On Mar 26, we issued an updated research report on Apogee Enterprises, Inc. APOG. The company is poised to gain from a growing construction market, focus on operational improvements and the impact of the U.S. tax reform. However, rising costs are expected to dent its performance in near future.
Let’s illustrate the factors in detail.
Growing Construction Market to Aid Results
For fiscal 2019, Apogee anticipates double-digit revenue growth and triple-digit basis-point improvement in its operating margin. Apogee believes that the North American commercial construction markets will grow throughout fiscal 2020 as market activity, Architecture Billings Index (ABI), office employment and office vacancy rates exhibit a positive momentum.
In February 2018, the ABI score was 52.0. A score above 50 indicates sustainable growth in architectural activity. With internal market visibility from backlog, commitments and bidding activity, along with external metrics moving in the right direction, the company foresees continued market growth for next few years.
Operational Improvements Remains on Track
In January 2018, Apogee announced closing its Viracon architectural glass plant in St. George, UT, to counter the headwinds of the glass business. It remains confident that despite the closure, given the capacity additions elsewhere and productivity investments made over the past five years, it will have adequate glass capacity to cater to the peak commercial construction market demand.
U.S. Tax Reform to Boost Earnings
Apogee anticipates a favorable impact of one or two cents per share in fourth-quarter fiscal 2018 favored by a lower federal tax rate due to the tax reform. For fiscal 2019, Apogee expects a tax rate of 23-24% compared with prior estimates of around 33%, which will be beneficial to its bottom line.
Elevated Costs Led to Guidance Cut
Apogee lowered its fiscal 2018 guidance due to lower-than-expected volume and pricing in the Architectural Glass segment and higher-than-expected healthcare costs. In addition, the trimmed outlook reflects charges that will result from the restructuring activities in fourth-quarter fiscal 2018. It expects to incur $4.5 million or 11 cents per share of restructuring costs in the fiscal fourth quarter.
The company also narrowed its revenue growth guidance to around 20%, due to hurricane-related delays and other project timing. The reduction is mainly driven by lower volume leverage, higher healthcare costs and price mix at the Architectural Glass segment. It also trimmed its earnings per share guidance for fiscal 2018 to $2.58-$2.68.
Share Price Performance
Apogee’s shares significantly underperformed the industry with respect to price performance over the past year. The industry edged down 5.7%, while the stock lost around 24.2% over the same time frame.
Zacks Rank & Stocks to Consider
Apogee currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the same sector are Dover Corp. DOV, Ashtead Group PLC ASHTY and Cimpress N.V. CMPR. Each stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Dover has long-term earnings growth rate of 13%. Its shares rallied 26% over the past year.
Ashtead Group has long-term earnings growth rate of 15%. Its shares increased 36% during the past year.
Cimpress has long-term earnings growth rate of 14.5%. The stock gained 96% in a year’s time.
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