2023-09-24 07:51:17 ET
Summary
- Apogee Enterprises recently announced its Q2 FY24 results, with a decline in net sales and a slowdown in the construction industry.
- The company's operating income and margins improved, but the sales decline is a concern for future growth.
- The stock price is currently trading in a range, and investors are advised to hold off on new positions until a breakout occurs.
Apogee Enterprises ( APOG ) designs glass and its products worldwide. Although the stock hasn’t moved much since my last article, the returns are still positive. APOG recently announced its Q2 FY24 results. Their sales saw a decline, and I expect sluggish sales growth in the coming quarters. Hence, I am downgrading my rating to a hold.
Financial Analysis
APOG recently announced its Q2 FY24 results . The net sales for Q2 FY24 were $353 million, a decline of 4.9% compared to Q2 FY23. The decline in sales was due to underperformance in its architectural framing systems, architectural services, and large-scale optical segments. The sales in the architectural framing systems and architectural services segments declined by 8.1% and 17.4% in Q2 FY24 compared to Q2 FY23. Both the segments saw a volume decline, and the reason behind the lower project volume in the architectural services segment was lower revenue recognition due to its projects being in the early completion cycle. The sales in the large-scale optical segment declined by 6.3% in Q2 FY24 compared to Q2 FY23. The sales in this segment were affected due to customer inventory destocking issues.
Its operating income margin for Q2 FY24 was 11.4%, which was 8.6% in Q2 FY23. The improvement in the operating income margin was mainly due to the architectural glass segment, which benefited from better pricing and favorable operating leverage. Its net income in Q2 FY24 was $33.3 compared to a net income of $37.3 million in Q2 FY23. In Q2 FY23, the company received a tax benefit of $7.2 million, so if we exclude the tax benefit, the net income in Q2 FY24 is higher. Although its sales declined, its operating income and margins improved, which shows management’s efficiency. Their decision to discontinue products with lower margins is proving to be beneficial for the company. But we cannot ignore the sales decline, and I have a concern. I expect its growth to be modest in the coming quarters, and we might see declining growth in the second half of FY24 compared to FY23. The reason behind the statement is a slowdown in the construction industry. The mortgage rates are still elevated, and the current rates are the highest in the last 20 years, which is not a positive sign because if the construction industry continues to struggle, it might affect the demand, which will adversely affect the company’s sales. So, I don’t expect positive growth in the company’s sales in the coming quarters. Hence, until the construction industry comes back on track, I expect weakness in its financials.
Technical Analysis
It is trading at the $48.1 level. After consolidating in a range of $36-$49 for the last 30 months, the stock broke out of the range in the month of August. But looking at the recent candles, it seems to be a case of breakout failure; well, it might be too early to say that it is a breakout failure. However, I would suggest investors not take any new positions in the company because its stock price might continue to trade in a range. A new opportunity will only arise if the price breaks the $50 level; if it breaks $50, then the next resistance zone is at $60. So, if the stock gives a breakout, then it has a solid upside potential, but until then, I would advise avoiding it and talking about investors who invested after my last article. I would advise them to continue to hold the stock because I don’t see any major red flags in the chart.
Should One Invest In APOG?
First, look at its valuation. It has an EV / EBIT [FWD] ratio of 8.82x, lower than the sector ratio of 15.08x, and has an EV / Sales [FWD] ratio of 0.87x, which is lower than the sector ratio of 1.65x. I still believe that it is undervalued and has a lot of potential. But there are some macroeconomic headwinds that I discussed earlier, which might hamper its growth in the coming quarters. The company struggled with the slowdown in the construction industry, and as a result, its sales declined. I expect declining growth and weakness in the coming quarters. Hence, considering these factors, I am downgrading my rating to a hold from buy. Although I still think APOG has a solid long-term potential and is undervalued. But despite the undervaluation, the current macroeconomic headwinds are a concern that can adversely affect the company’s operation and its share price in the near future.
Risk
Their Architectural Framing Systems and Architectural Services businesses employ aluminum as a substantial input to their products, and supply chain disruptions and unfavorable pricing changes in the market for raw aluminum could have a detrimental impact on those two segments' operating results. The price of aluminum they buy from domestic and foreign sources has been more volatile in recent years. They have significant cross-border activity because its Architectural Framing Systems sector and Architectural Services section are present in Canada, buying inputs from U.S. suppliers and selling to U.S. clients. Therefore, a dramatic shift in U.S. trade policy against Canada could negatively affect their operating results.
Bottom Line
I am downgrading my rating to a hold from a buy because the construction industry is facing a slowdown and is affecting the company's operations, and we saw its effect in the quarterly results. The company's sales were affected in Q2 FY24, and I expect sluggish revenue growth in the coming quarters. Hence, despite the low valuation, I assign a hold rating on APOG.
For further details see:
Apogee Enterprises: Concerning Slowdown In The Construction Industry (Rating Downgrade)