Balanced Risk-Reward for Apogee - Analyst Blog

On Mar 7, 2014, we issued an updated research report on Apogee Enterprises, Inc. APOG. The leader in technologies for design and development of value added glass products, services and systems reported an 18% increase in its third-quarter 2013 earnings to 33 cents per share. The improvement was particularly driven by improved mix and productivity in the Architectural Glass segment as well as increasing margins and good project execution.

For fiscal 2014, Apogee raised the lower end of its earnings guidance on the back of strong backlog at improving margins and project pipeline. Apogee now expects earnings in the band of 95 cents per share to $1.00 per share compared with the previous guidance of 93 cents per share to $1.00 per share. The company guides annual sales growth in the range of 10–11%.

Consolidated backlog at the end of the third quarter was $300 million. The company has maintained this level for six straight quarters. Approximately 45% of the backlog, or $136 million, is expected to be delivered in fiscal 2014, and the balance 55% or $164 million, in fiscal 2015. Apogee's backlog remains strong, which bodes well for its future performance.

Apogee targets $1 billion in revenues and 10% operating margins by fiscal 2016. Its focus on operational improvements, expansion in new geographies and markets, and new product launches will fuel revenue growth going forward.

Apogee remains focused on its strategy to expand its architectural framing systems segment through geographic expansion, new products and domestic acquisition. The company's acquisition of Custom Window Company, Inc., which makes aluminum window products, will enable it to better serve its customers in the Western U.S. and the historical renovation market nationwide.

Furthermore, the acquisition of Alumicor Limited, which finishes and fabricates aluminum frames for window, storefront, entrance and curtainwall  products for the Canadian commercial construction industry, will help Apogee expand its presence in the Canadian non-residential market, and will also contribute to growth through new product introductions.

On the flipside, in the first three quarters of fiscal 2014, operating margins in the Architectural Framing Systems segment declined due to the lower sales in the window business because of an anticipated gap in the schedule for more complex projects, resulting in lower capacity utilization. Third-quarter capacity utilization across all architectural manufacturing businesses was 68% in the third quarter.

Low capacity utilization might continue to adversely impact the company's margins. If the company fails to achieve near-to-intermediate market share gains, it will be left with a large amount of idle capacity. This would negatively impact profitability and the return on invested capital ROIC for Architectural businesses.

Furthermore, macroeconomic conditions might be a headwind for Apogee's performance in fiscal 2014. Moderating global economic growth can limit Apogee's near-term revenue visibility.

Apogee currently carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better-ranked stocks worth considering in the sector include Kadant Inc. KAI, Middleby Corp. MIDD and Sun Hydraulics Corp. SNHY, all of which sport a Zacks Rank #1 (Strong Buy).