On Mar 21, 2013, we downgraded our recommendation on leading designer and developer of glass products, services, and systems, Apogee Enterprises Inc. (APOG) from Outperform to Neutral, driven by Apogee’s focus on increasing its exposure both domestically and internationally, strong backlog in the architectural segment and the non-residential construction market, offset by concerns regarding weak performance in the Large-Scale Optical segment and macroeconomic headwinds.
Why the Downgrade?
The architectural segment returned to profitability in the fiscal second quarter of 2013 and reached record levels in the third quarter, driven by higher pricing of architectural glass and increased margins in the installation businesses. The segment’s backlog reached its highest level in 13 quarters at $300 million, which bodes well for its future performance.
Apogee recently extended its secured revolving credit facility by five years to Oct 2017 and expanded it to $100 million from $80 million. The expanded credit facility, along with Apogee’s strong balance sheet and improving free cash flow position will enable it invest both domestically and internationally.
The company intends to add new capacities as well as to fund acquisitions. Focus on operational improvements, expansion in new geographies and markets, new product launches will fuel Apogee’s revenue growth going forward.
Apogee has faced challenging commercial construction market conditions so far. However, the U.S. construction is finally stabilizing and is on the road to a much-awaited recovery. The American Institute of Architects projects a 5% increase in spending in 2013 for non-residential construction project and 7.2% for 2014. This bodes well for Apogee’s going ahead.
However, macroeconomic conditions might be a headwind for Apogee’s performance in fiscal 2013. Moderating global economic growth and uncertainty in the global economic scenario can limit Apogee’s near-term revenue visibility.
The Large-Scale Optical segment witnessed a 5% decline in sales and lower year-over-year profits. The third quarter is seasonally the segment’s strongest quarter. Results were impacted by timing of customer promotions and Sandy.
The Large-Scale Optical Technologies’ sales are highly dependent on a small number of customers. Consequently, loss of a significant customer or a significant reduction in pricing or a shift to a less favorable mix of value-added picture framing glass products for one of those customers could materially reduce the segment’s sales and operating results.
Other Stocks to Consider
Apogee Enterprises currently retains a Zacks Rank #3 (Hold). Other stocks in the same industrial products sector with favorable Zacks ranks are Valmont Industries, Inc. (VMI) with a Zacks Rank #1 (Strong Buy), Kaydon Corporation (KDN) and Worthington Industries, Inc. (WOR), which carry a Zacks Rank #2 (Buy).
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