Apogee Enterprises: Offers A Bit More Upside From Here

Summary

• Apogee Enterprises continues to post attractive sales, profit, and cash flow growth.
• It's unclear what the picture holds for the business, but the overall picture looks positive for shareholders at the moment.
• Given how cheap shares are, additional upside from here is likely warranted.
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Author - SEC EDGAR Data

In any market, but especially in this kind of market where good returns are hard to come by, it can be tempting to sell stock in a business that has already experienced a nice bit of upside. While never a bad idea to pocket gains, it does have the downside of potentially leaving money on the table. Such would be the case, in my opinion, if investors in Apogee Enterprises (NASDAQ:APOG) were to elect to sell their stock now. Thanks to strong fundamental performance, shares of the window, curtain walls, and glass company have roared higher in recent months. Even with that move higher though, shares are trading at levels that look quite cheap on an absolute basis. Given the overall health of the enterprise, and how cheap shares are, I do believe that additional upside potential is on the table. So even though the stock has performed nicely, I do believe that the firm still warrants a 'buy' rating at this time.

Solid performance

Back in the middle of September of last year, I wrote a bullish article covering Apogee Enterprises. In that article, I talked about how shares of the business had declined over the prior few months, even as fundamentals remained strong. Strength for the company was expected to continue through the end of the firm's 2023 fiscal year. So because of that expectation and because of how cheap shares were, I felt as though the stock warranted some upside. This ultimately led me to upgrade the company from a 'hold' to a soft 'buy' to reflect my view that shares should generate returns that exceed the broader market for the foreseeable future. Since then, the market has come to agree with me. While the S&P 500 is down 1.1%, shares of Apogee Enterprises have seen upside of 12.9%.

Author - SEC EDGAR Data

In my opinion, a lot of the upside the company experienced was driven by robust financial performance in the most recent quarters. Consider the third quarter of the company's 2023 fiscal year. Sales during that time totaled $367.8 million. That's 10.1% higher than the $334.2 million reported the same quarter one year earlier. The largest chunk of this growth came from the Architectural Framing Systems segment of the company, with revenue expanding from $141.5 million to $165 million. Much of this increase, management said, was driven by the company's ability to push inflationary costs onto its customers through price increases.

On the bottom line, the picture also improved. Net income more than doubled from $11.1 million to $23.8 million. In addition to benefiting from the rise in sales, the company also saw its gross profit margin improve from 19.4% to 23.5%. This, management said, was really just attributable to the company's ability to push more than its cost increases onto its customers. Other profitability metrics followed suit. Operating cash flow jumped from $31.4 million to $53.7 million. If we adjust for changes in working capital, the increase would have been more modest from $31.1 million to $36.3 million. And finally, EBITDA for the business grew from $33.6 million to $44.7 million.

Author - SEC EDGAR Data

When it comes to the first three quarters of the 2023 fiscal year as a whole, sales hit nearly $1.10 billion. This was up from the $986 million reported the same time one year earlier. Profits skyrocketed from $19.8 million to $83.9 million. It is true that operating cash flow during this window of time declined, dropping from $86.3 million to $51.1 million. But if we adjust for changes in working capital, we would have seen an increase from $85.2 million to $135.1 million. And over that same window of time, EBITDA for the business expanded from $93 million to $127.3 million.

When it comes to 2023 and its entirety, management has provided a little bit of guidance. They said that overall revenue should be about 10% higher than it was in 2022. Considering that revenue growth in the first nine months of the fiscal year was 11.2% higher than what we saw one year earlier, that does imply some slowdown in growth for the final quarter. Earnings per share are forecasted to come in at between $3.90 and $4.05. That's up from the prior expected range of between $3.75 and $4.05. At the midpoint, this would imply adjusted earnings for the company of $88.6 million. No guidance was given when it came to other profitability metrics. But based on my estimates, adjusted operating cash flow should be around $179 million, while EBITDA should come somewhere around $191.8 million.

Author - SEC EDGAR Data

Taking these figures, I calculated that the company is trading at a price-to-earnings multiple of 11.4. This is down significantly from the 65.8 reading that we get using data from the 2022 fiscal year. And it is also an improvement over the 16.4 reading that we get using data from 2021. The price to adjusted operating cash flow multiple should be about 5.7. As you can see in the chart above, this is also lower than what we get using data from 2021 or 2022. The same kind of trend can also be seen when looking at the EV to EBITDA multiple. For the 2023 fiscal year, this should be around 6.2. As part of my analysis, I compared the company to five similar businesses. On a price-to-earnings basis, these companies ranged from a low of 5.1 to a high of 26.3. Two of the five firms were cheaper than Apogee Enterprises. Using the price to operating cash flow approach, the range was from 6.1 to 38.9. In this case, our prospect was the cheapest of the group. And finally, the range for the companies for the EV to EBITDA multiple was between 3.3 and 9.1. In this case, three of the five companies were cheaper than our target.

Company	Price / Earnings	Price / Operating Cash Flow	EV / EBITDA
Apogee Enterprises	11.4	5.7	6.2
American Woodmark (AMWD)	11.6	6.1	6.1
JELD-WEN Holding Inc. (JELD)	26.3	38.9	9.1
Quanex Building Products (NX)	9.4	8.5	5.2
Tecnoglass (TGLS)	12.9	14.2	7.9
Insteel Industries (IIIN)	5.1	23.2	3.3

Click to enlarge

Takeaway

Pretty much no matter how you slice it, Apogee Enterprises has been having a stellar year. Management has succeeded in raising prices enough to cover costs, plus enough to drastically improve profitability over what it was one year earlier. Investors would be right to question whether this can continue if the economy weakens. Even if it doesn't continue, shares of the business still look attractively priced, using data from prior fiscal years. Relative to similar firms, the company might be trading a bit on the low side. But on an absolute basis, the stock is definitely affordable. I don't believe the upside from this point is drastic if we assume that the economy will slow down. But I would make the case that it's enough to still warrant a soft 'buy' rating on the company for now.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.