Will Engaged Capital Be the Catalyst that Takes Apogee Enterprises’ Stock Higher?

Apogee Enterprises Inc (NASDAQ:APOG), a manufacturer of architectural glass and metal glass framings, which has One World Trade Center and Petronas Towers in Kuala Lumpur among its clients, has seen its stock decline by over 20% in the last 12 months. Among the reasons for the decline were lower-than-expected results, with the company missing both EPS and revenue estimates for the fiscal third quarter reported in December. It also missed revenue estimates for the fiscal fourth quarter in its latest financial report. The company has posted EPS of 0.96, which topped the consensus by $0.34, while its revenue of $353.45 million was almost $10 million lower than expected. Investors were disappointed to see revenue below expectations, but they also took issue with lower gross and operating margins. The company’s fourth-quarter gross margin slid by 193 basis points to 24.24% and operating margin inched down by 52 basis points to 9.6%.

Apogee operates in four segments: Architectural Glass, Architectural Framing Systems, Architectural Services and Large-Scale Optical Technologies. Other than LSO, the other three segments each account for 31% of the company’s sales on average, with Architectural Services amassing 24% of sales, while Architectural Glass and Architectural Framing Systems representing 33% and 35% of the sales, respectively.

Over the last couple of years, Apogee Enterprises Inc (NASDAQ:APOG) has been consistently increasing its revenue from around $700 million in 2013 to $1.33 billion in the fiscal 2018 (ended March 3, 2018). A significant part in revenue growth was played by acquisitions. Last year, Apogee bought EFCO Corporation, a manufacturer of architectural aluminum window, curtainwall, storefront and entrance systems with $250 million in annual revenue. A year earlier, the company bought Sotawall, a manufacturer of high-performance unitized curtainwall systems with $100 million in revenue. Both acquisitions were included in the Architectural Framing Systems unit, which saw a 75% revenue boost in 2017, while other segments saw their revenue decline.

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Looking forward, Apogee should see further revenue growth in the next couple of years. The outlook for the US construction industry is positive, with Oldcastle estimating a growth in activity of 4%, with 6% growth expected in residential construction. Non-residential construction is expected to grow at just 2%, but office construction, which is Apogee’s core client base, is expected to grow at 6%. Construction of office spaces should be aided by a robust economic growth and by the recent corporate tax rate cut, which leaves companies with more money that could also be spent on office space.

However, it’s not all clear skies for Apogee Enterprises Inc (NASDAQ:APOG). While its revenue grew by 19% last year, its earnings declined by 7%. Part of the lower earning is the higher interest expense, which grew to $5.51 million from less than $1.0 million last year as a result of more debt that the company has taken to support the acquisitions. At the same time, Apogee saw a 21% increase in cost of sales, although it is close to revenue growth. Another item that could raise some concerns is selling, general and administrative expenses, which surged by 29% to $219.23 million in 2017. In the last couple of years, SG&A growth also outpaced revenue growth, but by a lower margin.

To improve its profitability, Apogee Enterprises Inc (NASDAQ:APOG) has been focusing on improving its margins. One of the recent steps it has taken involves the restructuring of its Architectural Glass division. The company plans to invest in its Viracon subsidiary and last month it closed its smallest domestic architectural glass plant in Utah. It expects to take a restructuring charge of around $4.5 million and the payback to come in one year.