Citi Comments Federal Signal Corporation Following Earnings

Results and the outlook did little to bolster conviction in the turnaround story at Federal Signal Corporation FSS, but low expectations helped fuel a 4.5% share price increase despite the 7c EPS miss and dividend cut. Municipal austerity remains a key headwind impacting roughly two-thirds of sales, but a sequential uptick in orders, including some longer-cycle businesses in ESG and Bronto was encouraging.

Process improvement initiatives led by new CEO Dennis Martin are underway, and the new management was sufficiently bolstered to set 2012 margin targets for each segment. Citi still believes management has a short timeframe to generate meaningful operating improvements before the proverbial “strategic alternatives” become a more pressing scenario. In the meantime, Citi maintains a “show-me” stance, and cuts its 2011/2012 EPS estimates, and target price by $2 to $6.

Citi has a Hold rating on FSS

FSS closed Wednesday at $5.55