Earnings Preview: Apogee Enterprises

Apr. 1.11 | About: Apogee Enterprises, (APOG)

Apogee Enterprises, Inc. (NASDAQ:APOG) is slated to release its fiscal 2011 results on Wednesday, April 6, 2011.

The current Zacks Consensus Estimate is a loss per share of 9 cents for the fourth quarter fiscal 2011 and a loss per share of 45 cents for fiscal 2011.

Over the trailing four quarters, Apogee Enterprises fell short of the Zacks Consensus Estimate for three straight quarters but outperformed in the third quarter of fiscal 2011. The average earnings surprise was negative 77.03%.

Third Quarter Recap

Apogee reported a third-quarter fiscal 2011 operating loss of 8 cents per share, compared with operating earnings of 39 cents in the year-ago quarter. The operating loss per share was an improvement over the Zacks Consensus Estimate for a loss of 10 cents.

Apogee’s total operating revenue for the third-quarter fiscal 2011 was $147.2 million, versus $179.8 million in the year-ago period, reflecting a decline of 18%. The decline can be ascribed mainly to the 21% revenue plunge in the Architectural Products and Services segment. The revenue reported by the company fell short of the Zacks Consensus Estimate of $151 million.

Sales in the Architectural segment slumped 21% in the quarter to $125.7 million. The shortfall was due to a decrease in volume and prices across the board, with architectural glass revenues especially affected by lower pricing. The segment reported an operating loss of $8.4 million, compared with an operating income of $9.6 million a year ago. This was affected by lower pricing in the architectural glass business, which was hit by low volumes.

Sales in the Large-Scale Optical segment dipped 1% in the quarter to $21.4 million. The segment’s operating income remained flat at $7.4 million.

Architectural Products and Services ended the third quarter of fiscal 2011 with a backlog of $165.7 million, down from $193.0 million at the end of the second quarter. Of the backlog, approximately $87 million (52%) is expected to be delivered in fiscal 2011 and $68 million (41%) in fiscal 2012.

Apogee expects total revenue for fiscal 2011 to decline by 17% from the fiscal 2010 level, a dip from its previous guidance for a drop of 15%. Fourth-quarter revenues are expected to be comparable to the prior-year quarter. However, the company anticipates a loss in the quarter as earnings in the Large-Scale Optical segment will not be sufficient to offset losses in the Architectural segment.

Fiscal 2012 is expected to be a profitable year as architectural glass price increases should begin to flow through early in the year. However, its markets are not expected to show significant improvement until later in calendar 2011, given that Apogee is a very late cycle company that lags commercial construction markets by several months.

The company stated that even though the reported backlog declined in the third quarter, the total backlog along with the value of awarded projects waiting to be signed was steady compared to the sequentially preceding quarter.

Estimate Revision Trend

For the fourth quarter, estimates have not budged in the last 30 days. For fiscal 2011, only one estimate has been raised for Apogee. The current Zacks Consensus Estimate is a loss of 9 cents for the fourth quarter, compared to earnings per share of 1 cent in the year ago quarter.

For fiscal 2011, the Zacks Consensus Estimate is pegged at a loss per share of 45 cents, compared with earnings per share of $1.13 in the previous year. For fiscal 2012, the Zacks Consensus Estimate stands at 17 cents, an annualized growth of 137%, implying that analysts expect Apogee to return to profitability in fiscal 2012.

Agreement of Estimate Revisions

Over the last 30 days, only one analyst out of four covering the stocks has revised the estimate upward for fiscal 2011. There has been no movement in estimates for the fourth quarter of fiscal 2011 and fiscal 2012.

Magnitude of Estimate Revisions

Over the past 30 days, earnings estimates for the fourth quarter of fiscal 2011 improved to a loss per share of 9 cents from the previous estimate for a loss of 10 cents per share. For fiscal 2011, the loss per share improved to 45 cents over the past 30 days from the previous estimate for a loss of 49 cents. However, there has been no movement in estimates in the past 7 days.

Our Take

Revenues have declined in the Architectural segment, which continues to be hurt by challenging commercial construction market conditions that have led to lower demand.

The Architectural segment contributes roughly 90% of Apogee Enterprise’s total revenue and is highly contingent on economic trends within the North American commercial construction industry. Backlog at the segment has shown a declining trend, reflecting weak commercial construction activity, resulting in lower visibility for the segment.

Apogee implemented a number of cost-cutting initiatives and remains focused on productivity improvements to counter the downturn in commercial construction. The company maintained its capacity and people to respond to potential growth in fiscal 2012, and continues to emphasize longer-term strategies to expand its energy-efficient architectural glass offerings both domestically and all over the world.

Apogee Enterprise’s low debt position is a positive. The debt-to-capitalization ratio was 6.1% as of November 27, 2010, compared with 5.7% as of August 28, 2010. The company can thus use its cash balance to expand into new markets (likely international), invest in research and development, productivity and operational improvements, and continue to pay dividends.

Even though fiscal 2011 is expected to remain challenging for the Architectural segment, fiscal 2012 looks more positive with a possible market recovery, increased backlog and expectations that the recent architectural glass price increases will allow the company to return to profitability during the year. Apogee currently retains a Zacks #3 Rank (short-term 'Hold' rating). Our long-term recommendation on the stock remains “Neutral.”

Apogee Enterprises is a leader in technologies for the design and development of value-added glass products services and systems. The company presently has two reportable segments – The Architectural segment and The Large-Scale Optical Technologies. Apogee competes with PPG Industries Inc. (PPG), privately held Guardian Industries Corp. and Pilkington Group Limited.