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4 Major Factors Influencing Quanex's (NX) FYQ3 Performance

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Quanex Building Products Corporation (NX - Free Report) has been benefiting from solid demand for its products and robust housing industry prospects. The company’s low-cost, short lead-time production processes, engineering expertise, global presence as well as sales and marketing efforts are driving its overall performance. This apart, solid business strategy and cost-containment efforts are supporting growth.

In the past year, Quanex’s shares have surged 50.6% compared with the industry’s 28.9% rally backed by the above-mentioned tailwinds and solid earnings surprise history. Its earnings topped analysts’ expectation in the trailing three quarters, with an average of 444.1%.

The company’s fiscal third-quarter earnings, set to be released next month, are likely to have benefited from these factors. Yet, inflationary pressures and higher selling, general and administrative expenses (SG&A) may mar its prospects.

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Let’s check out the factors influencing the performance of this Zacks Rank #3 (Hold) company in the fiscal third quarter. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Solid Demand & Housing Prospects: Quanex has been witnessing solid demand for its products, mainly backed by strong North American residential housing market (including both new construction, and repair and remodel). The company anticipates strength in the industry to remain robust for the rest of fiscal 2021.

In the fiscal second quarter, it registered 34.6% sales growth in the North American fenestration segment, 25.5% in the North American cabinet components segment and 92.1% in the European fenestration segment, excluding foreign exchange impact. Increased pricing, with respect to raw material cost inflation, also aided the growth. Impressive growth of 126.3% in adjusted earnings was backed by higher volumes and improved operating leverage, partially offset by an increase in SG&A.

Robust Outlook & Prospects: Backed by strong first-half results and impressive macroeconomic indicators for the residential housing industry, the company has raised expectations for fiscal 2021. It now expects sales growth of 20% in the North American Fenestration segment, 15% in the North American Cabinet Components segment and 40% in the European Fenestration segment.

On a consolidated basis, net sales are expected between $1.04 billion and $1.06 billion, and adjusted EBITDA within $125-$130 million in fiscal 2021.

The Zacks Consensus Estimate for fiscal third quarter earnings is currently pegged at 50 cents per share, indicating a 47.1% increase from the year-ago period. The same for revenues is pegged at $270.3 million, suggesting a 27.4% increase from a year ago.

The consensus mark for fiscal 2021 earnings is currently pegged at $1.73 per share, indicating a 29.5% increase from the year-ago figure of $1.24. The same for revenues is pegged at $1.05 billion, suggesting a 23.5% increase from a year ago.

The company’s solid VGM Score of A, driven by a Value Score of A and Growth Score of B, is also justifying its prospects.

Acquisitions & Buyouts: Quanex primarily invests in organic growth initiatives and intends to acquire businesses that allow it to expand fenestration and cabinet component footprint, enhance product offerings, provide new complementary technologies, enhance leadership position as well as expand into new markets/service lines.

Meanwhile, the company continues to evaluate the business portfolio to ensure that it is investing in the right markets wherein there is potential for future growth.

Material, Labor and Supply Chain Challenges: Not only Quanex but also overall construction and related industries are experiencing inflationary pressure and challenges within the supply chain. Although companies are raising prices for their products to mitigate the pressure, these headwinds are likely to impact bottom-line results.

Quanex — which shares space with Owens Corning Inc. (OC - Free Report) , Masco Corporation (MAS - Free Report) and Gibraltar Industries, Inc. (ROCK - Free Report) in the Zacks Building Products – Miscellaneous industry — witnessed subtle adjusted EBITDA growth during the fiscal second quarter. Margins were under pressure in the North American cabinet components segment, primarily due to hardwood cost inflation.

During the fiscal second quarter conference call, the company noted that it will be challenging to realize adjusted EBITDA margin in the fiscal third quarter due to inflationary pressures. Again in the fiscal fourth quarter, it does not expect to realize margin expansion.