Neutral on Apogee (APOG) (MWA) (VMI) (WOR)

On May 3, we maintained our Neutral recommendation on leading designer and developer of glass products, services, and systems, Apogee Enterprises Inc (APOG), based on strong backlog in its architectural segment, revenue growth opportunities from focus on operational improvements, expansion and new product launches, recovery in U.S. construction; partially offset by concerns regarding moderating global economic growth.

Why Reiterated?

Apogee’s fourth-quarter fiscal 2013 earnings of 15 cents per share were up 36% from the year-ago quarter. Total revenue improved 6% to $180 million. However, both fell short of the respective Zacks Consensus Estimates.

For fiscal 2014, Apogee expects earnings to lie in the range of 90 cents to $1.00 per share on the back of high single-digit revenue growth. Gross margin is anticipated to be at least 22% in fiscal 2014. Geographic growth in the domestic markets, introduction of new strong architectural glass pricing and mix and improving installation margins are expected to contribute to revenue growth. Furthermore, Apogee’s productivity initiatives are expected to generate 50 to 100 basis points of margin improvement.

Overall, in fiscal 2013, architectural segment revenues grew 6%, led by the installation, storefront and window businesses, and operating income improved by more than $20 million, on the back of improved architectural glass pricing and product mix, good operational performance across the segment. Backlog in the architectural segment at the end of the fourth quarter of fiscal 2013 was $297 million compared with $237 million in the year-ago quarter. Apogee expects to deliver 86% of the backlog (nearly $255 million) in fiscal 2014 and the remaining 14% (nearly $42 million) in fiscal 2015.

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 calendar 2013 for non-residential construction project and 7.2% for 2014. This bodes well for Apogee’s going ahead.

However, macroeconomic conditions poses a headwind for Apogee’s performance in fiscal 2014. Moderating global economic growth and uncertainty in the global economic scenario can limit Apogee’s near-term revenue visibility

Other Stocks to Consider

Apogee retains a short-term Zacks Rank #4 (Sell). Other stocks in the same industrial products sector with favorable Zacks ranks are Valmont Industries, Inc. (VMI) and Mueller Water Products, Inc. (MWA) with a Zacks Rank #1 (Strong Buy) while Worthington Industries, Inc. (WOR) carries a Zacks Rank #2 (Buy).