2023-08-03 14:01:52 ET
Summary
- Apogee Enterprises Inc. has lackluster growth prospects, making it a hold rather than a buy.
- The company operates in the building products industry, with a focus on glass products like windows.
- The dividend yield is steadily growing, but revenue growth has been less impressive, averaging 0.78% CAGR in the last 5 years.
Investment Rundown
Operating in the building products industry Apogee Enterprises Inc ( APOG ) has made a name for itself by growing a strong line of glass and metals product line. The markets they work in span from the United States to Brazil. But I think investors shouldn't be too excited about the company right now in all honesty as the growth prospects are quite frankly very lackluster. There needs to be far more growth than what is being anticipated to transform what I view as a hold into a buy.
The positives of holding shares will come from the dividend yield which is steadily growing too. For 11 consecutive years, APOG has raised the dividend and this has been beneficial to shareholders. However, the revenue growth of the business is less impressive, only averaging a 0.78% CAGR in the last 5 years. It seems that EPS growth mainly comes from buying back shares rather than growing the top line significantly. The lack of momentum and growth doesn't make APOG a buy right now, instead, I think a hold rating seems more fitting.
Company Segments
As we learned before, APOG operates in the building products industry where it serves a variety of different end markets. Within the business, four various segments make up the structure. These are Architectural Framing Systems, Architectural Glass, Architectural Services, and lastly Large-Scale Optical Technologies. As we can see the focus of APOG lies in making glass products like windows. In the first segment, which is also the largest with $164 million in revenues, the focus revolves around designing and fabricating custom glass and aluminum windows. Besides that, they also have curtainwalls and storefronts in offerings. The second segment rather focuses on providing a range of high-performance glass products which are used for both windows and storefronts.
The most recent earnings report showed that the management is aiming to achieve stronger margins for the glass segment. Here the target is 10-15% instead, up from 7-10%. From the report, the net sales grew exponentially at 27% and this will be a driving force for growth going forward. It will also help offset some of the lack of momentum and volumes other segments are seeing. The architectural services saw a decline of over 10% YoY for sales and ended Q1 FY2024 at $89 million. The lower estimated profitability for the segment even resulted in the operating income being negative and this is giving support as to why the company is trading at a discount to the rest of the sector, about 35% lower.
Looking at where APOG sees themselves heading the EPS guidance was raised to $4.15 - $4.45. This is putting APOG at a FWD p/e of 11. I think this is still not good enough to make it a buy. The company lacks momentum in the biggest segment which only saw net sales grow by 0.5% YoY. In the face of higher material costs, I think that APOG looks quite vulnerable to volatility.
Where I think the spotlight should be for the next few quarters is the growth of FCF for APOG. If they are successful in growing that part of the business, despite lower volumes in some segments, investors will still have something to gain here in my view.
Risks
The company's performance is significantly tied to the North American economic landscape, given its three key segments: architectural glass, architectural framing systems, and architectural services. These segments rely heavily on the North American construction industry, which is inherently cyclical. As such, macroeconomic indicators, such as employment levels and interest rates, wield considerable influence over the construction sector, ultimately impacting the company's financial health.
While the company has demonstrated resilience in navigating economic cycles in the past, it remains exposed to potential challenges arising from shifts in economic conditions. For instance, during periods of economic downturn or rising interest rates, the construction industry may experience decreased demand for new projects or reduced investments in commercial and residential developments. Such adverse changes could directly affect the company's revenues and overall profitability.
Financials
Looking at the balance sheet for APOG it has made some decent progress every year.
The cash flow from operations grew to $21 million and the total FCF landed at $13.9 million. This is strong progress seeing as 12 months earlier it was negative instead. Debt has also been reduced to $170 million and I think this shows that APOG is in a strong financial position right now that doesn't present any significant risks in the short-term at least.
Industry Comparison
For investors that want exposure to the building products industry, I think there might be some more appealing options out there right now than what APOG is offering. Looking at a far larger company like Johnson Controls International ( JCI ) I think it appears as a better opportunity. Just looking at the dividend of the company it's higher at a yield of 2.13%. The p/e might be higher at a multiple of 19, which to be fair is quite in line with the sector. I would also expect that given the size of JCI, valued at $47 billion, it would have a valuation in line with the sector.
Growth for JCI seems far better than APOG too. There are predictions of an over 10% annual EPS growth until 2026. For the investors that want to go into the building products market, I think that going with one of the bigger ones seems to be the better option right now.
Final Words
As we have gone over in this article the growth of APOG is quite disappointing and it makes sense the company is trading at such a low multiple in comparison to larger players in the sector. The dividend is the biggest positive to the company and the reason I am rating it a hold. The dividend has been growing for 11 consecutive years and this has been very beneficial to investors. But as APOG offers far fewer growth opportunities than a company like JCI I don’t see why it could be a buy. To reiterate my stance on APOG I see them as a hold for now until there is more net sales growth than the 1.4% they produced in Q1 FY2024.
For further details see:
Apogee Enterprises: The Dividend Seems To Be The Only Exciting Part