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Quanex (NX) Climbs 36.6% YTD: Can the Bull Run Continue?

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Quanex Building Products Corporation (NX - Free Report) have been benefiting from gains in operational efficiency and the successful implementation of pricing initiatives. Also, solid performance of its European Fenestration segment has been aiding the stock to maintain momentum.

Shares of this company have gained almost 36.6% year to date compared with the industry’s 28.9% rally. Also, it has outperformed the S&P 500’s 17.2% rise in the said period. The price performance is backed by its impressive earnings surprise history. Notably, the company’s earnings surpassed analysts’ expectations in six of the trailing seven quarters.

Last month, Quanex, an industry-leading supplier of window and cabinet components to original equipment manufacturers, came up with solid results in second-quarter fiscal 2019 (ended Apr 30, 2019). Although its revenues fell shy of analysts’ expectations, earnings topped the consensus mark by 46.2% and increased 35.7% year over year. Importantly, free cash flow in the quarter was solid and more than doubled year over year to $13.6 million. This enabled it to repay $5 million in bank debt during the quarter and repurchase approximately $2.7 million of shares.

Hence, Quanex is one such company that continues to display strength in several areas. Adding the stock to your portfolio should certainly not be a disappointment. Earnings estimates have exhibited an uptrend, reflecting optimism in the stock’s prospects. The Zacks Consensus Estimate for the company’s 2019 and 2020 earnings has moved up 11.8% and 13.8%, respectively, over the past 60 days. Let us delve deeper into other factors that make this Zacks Rank #1 (Strong Buy) stock a profitable pick. You can see the complete list of today’s Zacks #1 Rank stocks here.

What’s Working in Favor of the Stock?

Successful Implementation of Pricing Initiatives: Quanex has been benefiting from pricing actions that were implemented early this year, in order to combat raw material inflationary pressure, particularly with respect to logistics, benefits and healthcare costs. This is quite evident from its second-quarter adjusted EBITDA margin, which expanded 70 basis points (bps) year over year. Margins expanded in the company’s three reportable segments. Adjusted operating margin rose 60 bps year over year in the NA Fenestration business, reflecting pricing actions and lower SG&A. Operating margin expanded approximately 500 bps in EU Fenestration, driven by narrowing input cost inflation in window spacers and vinyl extrusion. The NA Cabinet Components segment, which is usually challenged by market shift, recorded approximately 170-bps operating margin (adjusted) improvement on operational improvements and price.

Encouraging Growth in Europe Segment: Quanex has been registering strong revenue growth in the EU Fenestration segment, courtesy of market growth and price increases related to raw material inflation recovery. Second-quarter EU Fenestration sales rose 7% year over year, with sales growth of more than 15% excluding FX, on strong pricing growth. Operating margin rose about 500 bps, driven by reducing input cost inflation in window spacers and vinyl extrusion, along with strong pricing. The company expects a stronger second half for the NA Fenestration segment and continued strong growth in the EU Fenestration segment.

Strong Growth Prospects: Quanex continues to invest in organic growth initiatives, boost product offerings, provide new complementary technology, enhance leadership position within the markets served, and expand into new markets or service lines. The company, which divested non-core businesses in the past, continues to evaluate the business portfolio to position it well for future growth.

Quanex has solid growth prospects, as is evident from the Zacks Consensus Estimate for fiscal 2019 earnings of 85 cents per share, which indicates 30.8% year-over-year improvement. Moreover, its earnings for fiscal 2020 are expected to increase 15.9%.

Overall, it constitutes a great pick in terms of growth investment, supported by a Growth Score of A.

Other Stocks to Consider

Other top-ranked stocks in the Construction sector include Construction Partners, Inc. (ROAD - Free Report) , TopBuild Corp. (BLD - Free Report) and Aegion Corporation (AEGN - Free Report) . While Construction Partners and TopBuild sport a Zacks Rank #1, Aegion carries a Zacks Rank #2 (Buy).

Construction Partners surpassed earnings estimates in three of the trailing four quarters, with the average positive surprise being 11.9%.

TopBuild’s earnings for the current year are expected to increase 21.7%.

Aegion has a three-five year expected EPS growth rate of 10%.

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