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Gibraltar (ROCK) Rides on Value Creation Strategy, Costs High

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Gibraltar Industries, Inc. (ROCK - Free Report) remains well positioned on its four-pillar value creation strategy. The company’s strength in Renewable Energy & Conservation segment also bodes well for its future earnings prospects. However, softness in Infrastructure segment and material cost inflation raise concerns.

This leading manufacturer and distributor of building products recently reported mixed third-quarter results, wherein earnings beat the Zacks Consensus Estimate but revenues missed the same by 1.4% and 2.4%, respectively. Nonetheless, its quarterly earnings and revenues increased 2% and 6% year over year, respectively, backed by robust domestic demand in Renewable Energy & Conservation, as well as effective price-material cost management.

Let’s delve deeper into the other factors that substantiate its Zacks Rank #3 (Hold).

Key Growth Drivers

Gibraltar has been performing pretty well in the past few quarters. The company’s solid performance was backed by its four-pillar value creation strategy, which comprises operational excellence, product innovation, portfolio management and acquisitions as a strategic accelerator. Gibraltar’s product offering through 80/20 initiatives contributed significantly to its third-quarter performance. Notably, product innovation added 10% to the total revenues, as of Sep 30, 2018, up from 7% in the prior-year period.

The company keeps on evaluating its product lines, customers and end markets for allocating leadership time and financial resources to the highest-potential platforms and businesses. Along with portfolio management, the company remains committed toward acquisition of those companies that have a significant long-term value. On Aug 23, 2018, it acquired privately-held SolarBos, an electrical balance of systems products provider in the United States, which gives the company an opportunity to capture up to 30% more revenue on solar projects that it already participates in. This addition of SolarBos added approximately 2% to its segmental revenues in the third quarter and is expected to be accretive to 2019 earnings as well.

Additionally, the company remains encouraged by the long-term market growth prospects of both Renewable Energy and Conservation businesses. Most importantly, strong demand for community solar as well as robust growth in the cannabis market are expected to continue in the coming period as well.

Notably, during the third quarter of 2018, the company’s overall earnings increased 6% year over year on the back of robust Renewable Energy & Conservation segment, effective price-material cost management and solid execution of 80/20 simplification initiatives. Also, higher-margin innovative products supported the upside.


Concerns

Although Gibraltar reported better-than-expected earnings in three of the trailing four quarters, its shares declined 24.1% over the past three months, underperforming the industry it belongs to. Also, earnings estimates for 2018 and 2019 have moved 0.5% and 0.8% south, respectively, over the past 30 days. The downside primarily stemmed from higher input cost inflation along with lower demand in the Infrastructure segment.

In the first nine months of 2018, gross margin in the Residential Products segment contracted 120 basis points (bps) year over year. Notably, its adjusted operating margin declined 160 bps in the third quarter, primarily owing to increased cost of sales, unfavorable product mix and lower volumes. Rising costs may worsen its bottom-line performance in the quarters ahead.

The steel and aluminum tariffs announced earlier in 2018 continued to impact its material costs. Although the company has been working to recover higher commodity costs through price increases, it expects continued volatility in material costs owing to tariff-related issues in the near term.

Stocks to Consider

Some better-ranked stocks in the Zacks Construction sector include Great Lakes Dredge & Dock Corporation (GLDD - Free Report) , Comfort Systems USA, Inc. (FIX - Free Report) and EMCOR Group, Inc. (EME - Free Report) . While Great Lakes Dredge & Dock and Comfort Systems sport a Zacks Rank #1 (Strong Buy), EMCOR carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes Dredge & Dock’s earnings for 2018 are expected to increase 111.1%.

Comfort Systems surpassed the Zacks Consensus Estimate in three of the trailing four quarters, with the average being 16.5%.

EMCOR’s 2018 earnings are expected to grow 20%.

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