Apogee Tweaks FY18 Guidance For EFCO Buy, FY19 View Positive

Apogee Enterprises, Inc. (NASDAQ:APOG) has revised fiscal 2018 guidance downward to reflect lower revenues and margins from the recently closed EFCO acquisition. This was due to revised cost estimates made post conclusion, on some projects that EFCO will be delivering in the second half of fiscal 2018. Nevertheless, the company maintains a positive outlook for fiscal 2019 based on growth in North American non-residential construction markets.

In May, Apogee had announced that it had entered into an agreement to acquire privately-held EFCO Corporation for approximately $195 million. The acquisition of the leading U.S. manufacturer of architectural aluminum window, curtainwall, storefront and entrance systems for commercial construction projects closed in early second quarter fiscal 2018 (ended Sep 2).

The EFCO acquisition will accelerate Apogee’s growth strategies. It will also help broaden Apogee’s product offerings and increase geographic presence across the United States. Given its concentration in mid-size to smaller commercial construction projects, EFCO is in sync with Apogee’s efforts to diversify future revenue streams. The company has a target to improve EFCO operating margins to double digits and to achieve annual synergies of $10-$15 million. For fiscal 2018, EFCO’s revenues are expected to be approximately $200 million, down from the previous outlook of $200-$220 million, and the operating margin is expected to be 2-3%, compared with mid-single digit.

To reflect this, the company now expects revenue growth of 24 to 26% for fiscal 2018, down from the prior guidance of 26-28%. Adjusted operating margin is expected to range between 11% and 11.5%. The company had earlier provided a range of 11.5-12%. Adjusted earnings per share for the year are projected to lie between $3.40 and $3.60, compared with the prior guidance of $3.65-$3.85. The new range reflects a year-over-year growth of around 12%. Adjusted earnings guidance excludes the after-tax impact of amortization of short-lived acquired intangibles associated with the acquired backlog of Sotawall and EFCO of $7 million or 24 cents per share and acquisition-related costs for Sotawall and EFCO of approximately $3 million, or 11 cents per share.

However, growing competitive pressures in the architectural glass mid-size project market are expected to constrain full-year growth to low-single digits while ongoing productivity improvements will drive operating margin. The long-term outlook related to European competition on larger projects looks promising with strengthening of the Euro. Apogee expects approximately $2 million non-cash, negative impact in the second quarter in the architectural framing systems segment due to foreign exchange.

The recent acquisitions of Sotawall and EFCO will also help build a more diversified portfolio, which offers greater long-term growth opportunities. For fiscal 2019, Apogee anticipates double-digit revenue growth and triple-digit operating margin improvement, backed by order pipeline, bidding and backlog already booked for fiscal 2019. Based on growth in North American non-residential construction markets, second-quarter growth in segment backlogs, strong bidding activity and external metrics, the company foresees continued market growth for three years.



Year to date, Apogee has underperformed the industry it belongs to. The stock has tanked 23.4% against the industry’s gain of 17.9%.

Apogee currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same sector include Terex Corporation (NYSE:TEX) , AGCO Corporation (NYSE:AGCO) and Caterpillar, Inc. (NYSE:CAT) . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Terex has expected long-term growth rate of 19.67%.

AGCO has expected long-term growth rate of 13.51%.

Caterpillar has expected long-term growth rate of 9.50%.

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