Apogee Enterprises, Inc. (APOG, Financial) delivers distinctive solutions for enclosing commercial buildings in glass. Headquartered in Minneapolis, Minnesota, the company is an industry leader in architectural products and services, providing architectural glass, aluminum framing systems and installation services for buildings, as well as value-added glass and acrylic for custom picture framing and displays.
The company was founded back in 1949 during the post-war commercial building boom and went public in 1971. The current market capitalization is approximately $1.1 billion.
Breaking down operations
The company has four reporting segments, with three of the segments serving the commercial construction market.
The Architectural Framing Systems segment designs, engineers, fabricates and finishes aluminum window, curtainwall, storefront and entrance systems comprising the exterior of buildings. In fiscal 2021, this segment accounted for approximately 46% of net sales.
The Architectural Glass segment coats and fabricates high-performance glass used in custom window and wall systems on commercial buildings. Last year, this segment accounted for approximately 24% of net sales.
The Architectural Services segment integrates technical services, project management and field installation services to design, engineer, fabricate and install building glass and curtainwall systems. In 2021, this segment accounted for approximately 24% of net sales.
The Large-Scale Optical Technologies (LSO) segment manufactures value-added coated glass and acrylic products for custom framing, museum and technical glass markets. In fiscal 2021, this segment accounted for approximately 6% of net sales.
Financial review
The company’s fiscal year ends in February each year, and the last reporting period was for the third quarter of fiscal 2022, which ended in November 2021. Third-quarter revenue grew 6.6% to $334.2 million compared to $313.6 million in the same quarter of fiscal 2021. This growth was led by good performance in the Architectural Services and Architectural Framing Systems segments. Adjusted earnings in the third quarter were $0.63 per diluted share compared to $0.90 in the same quarter of fiscal 2021.
The company has recently changed up its strategy in a bid to become the “economic” leader in its industry, which should help with reducing margins. CEO Ty R. Silberhorn said:
“While we are still early into our transformation journey, these efforts are beginning to be reflected in our financial results. Earnings this quarter improved sequentially compared to the second quarter, with encouraging progress on both revenue growth and margin expansion.”
For the first nine months of fiscal year 2022, operating cash flow was $86.3 million, compared to $120.5 million in the first nine months of fiscal 2021. Cash flow in the prior year period benefited from reduced working capital and temporary actions related to Covid-19. Capital expenditures were $13.1 million, down from $17.1 million in the same period last year, as the company slowed some investments while it conducted its strategic review.
In the third quarter, the company repurchased 165,851 shares of stock for $6.7 million. Year-to-date, the company has returned $44.2 million of cash to shareholders through share repurchases and dividend payments, up from $35.3 million in the first nine months of fiscal 2021.
Valuation
Analyst estimates for the 2023 fiscal year ending February 2023 are approximately $2.91. With Apogee's stock selling the mid-$40 range, that valuation does not seem excessive in my view.
In January 2022, the company increased its dividend 10% to an annualized rate of $0.88 per share. That equates to a dividend yield of approximately 2.0%, which is above the current S&P 500 dividend yield of 1.41%.
The company also increased its share repurchase authorization by 2 million shares, bring the total authorization to 2.6 million shares. The company apparently has confidence in its ability to generate enough free cash flow for these repurchases.
Guru trades
One Guru that has added to their Apogee position is First Eagle Investors. Major reductions have come from Hotchkis & Wiley, Joel Greenblatt (Trades, Portfolio) and Keeley Teeton Advisors.
Conclusion
The fears of a major secular reduction of office development and commercial building improvement appear to be overblown, in my opinion. This has created an opportunity for Apogee, which looks to be undervalued at this time. The company's balance sheet is strong and should be able to withstand any negative economic shocks in the commercial construction market.
