Before investing in any stock, investors always perform a deep analysis about that particular stock. They always prefer stocks with great potential and positive future growth. But, while performing these analyses they sometimes overlook certain stocks that may fetch a pocketful of return in future. Federal Signal Corporation (NYSE:FSS) is that kind of a stock with great potential.
Founded in 1901, this Oak Brook, Illinois- based company is a manufacturer and worldwide supplier of safety, signaling and communications equipment, hazardous area lighting, fire rescue products, street sweeping and vacuum loader vehicles, parking control equipment, custom on-premise signage, carbide cutting tools, precision punches and related die components. With a market cap of $931.71million, the company serves municipal, governmental, industrial, and commercial customers. Federal Signal has manufacturing facilities worldwide and operates in three groups: Safety and Security Systems, Environmental Solutions, and Fire Rescue.
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- FSS 15-Year Financial Data
- The intrinsic value of FSS
- Peter Lynch Chart of FSS
Tracking the Performance
On March 5, 2014, this leader in environmental and safety solutions reported fourth quarter 2013 adjusted net income from continuing operations of $21.9 million, equal to $0.34 per diluted share, up 298% compared to $5.5 million, or $0.09 per diluted share, in the same quarter a year ago. Consolidated net sales during the quarter were $219.6 million, up 1% versus the same quarter a year ago. The company’s fourth quarter income from continuing operations was $26.7 million, equal to $0.42 per diluted share, compared to $4.9 million, or $0.08 per share, in the prior year quarter. The company also reported operating income of $21.5 million for the quarter, up 65% versus last year, and orders of $238 million for the quarter, up 14% versus last year.
For fiscal 2013, Federal Signal reported consolidated net sales of $851.3 million, up 6% compared to the prior year. Income from continuing operations for the year was $160.2 million, equal to $2.53 per diluted share, compared to $22.0 million, or $0.35 per share, in the prior year. Further, company’s consolidated full year operating income was $70.6 million, up 37% compared to the prior year. Corporate operating expenses decreased by $4.6 million, or 17%, compared with the prior year. Consolidated full year operating margin improved to 8.3%, compared to 6.4% in 2012. The company’s group performance and balance sheet and cash flow items have been provided in the following chart.
Higher earnings and lower primary working capital helped to improve company’s operating cash flow. The strong cash flow allowed Federal Signal to significantly reduce its debt. Consolidated debt at the end of the third quarter was $128 million.
Interest expense was $1.1 million for the fourth quarter, down 81% versus a year ago, benefiting from lower debt levels and from the lower interest rates which derived from the Company’s March 2013 debt refinancing. Further, Corporate operating expenses were $7.7 million and $8.9 million for the three months ended December 31, 2013 and 2012, respectively. The $1.2 million decrease primarily related to reduced professional services and legal fees, combined with a $0.3 million reduction in restructuring charges.
As per the company’s point of view, its Environmental Solutions Group demand continues to be strong, and the Safety and Security Systems and Fire Rescue Groups are set up for steady improvement. With this momentum, Federal Signal expects 2014 earnings per share to at least $0.79, with upside if markets maintain or strengthen. This represents an 18% improvement compared to normalized earnings per share of $0.67 in 2013. Further, its effective book tax rate is expected to increase to approximately 32% in 2014.
Federal Signal’s growth strategy includes three areas; geographic expansion, new markets for existing products, and new product development and acquisitions. Geographic expansion includes Jetstream and Industrial Systems in the Asia Pacific and Middle East, export markets from the U.S., and introduction of Bronto in North America. A chart has been provided below to show the company’s industrial business growth areas.
Charts from company website
Federal Signal’s goal is to grow sales into industrial markets faster than into municipal markets as industrial markets offer greater growth potential and higher margins.
On a Concluding Note
Federal Signal’s strength can be seen in multiple areas such as well-defined market position in critical infrastructure markets, unparalleled brand equity and distribution franchise in core markets, strengthened balance sheet, profitability and free cash flow, flexible manufacturing capacity ready to deliver higher revenues and profits, favorable long-term market dynamics, and management execution. Further, with continued progress on operating margin targets and diversified product mix, this leader in environmental and safety solutions will provide a handsome return to its valued investors in the long run.