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Apogee (APOG) Poised on Favorable Markets Amid Higher Costs

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On Oct 1, we issued an updated research report on Apogee Enterprises APOG. The company is poised to gain from its efforts to increase market share, expand into new geographies and markets, solid bidding and order activities, and continued favorable outlook for the North America commercial construction market.

Apogee delivered strong earnings results for second-quarter fiscal 2020 (ended Aug 31, 2019). The company reported adjusted earnings of 72 cents per share, surpassing the Zacks Consensus Estimate of 57 cents by a margin of 26%. Also, the company generated revenues of $357 million in the reported quarter which came in line with the Zacks Consensus Estimate.

Apogee, along with, Dover Corporation DOV, Sonoco Products Company SON and Avery Dennison Corporation (AVY - Free Report) belongs to the Industrial Products sector.

Upbeat 2019 Prospects

Apogee expects revenue growth between 1% and 3% in fiscal 2020, with improvement across all segments, barring Architectural Services. The company projects operating margins at 8.2-8.6%, driven by improved margins in the Architectural Glass and Architectural Framing Systems segments. Adjusted earnings per share in fiscal 2020 are projected at $3.00-$3.20. Compared with earnings of $2.96 reported in fiscal 2019, the mid-point of the guided range reflects year-over-year growth of 5%.

Growth Drivers

Apogee’s focus on diversifying revenue streams, exploring growth opportunities and improving the efficiency of operations bodes well for recording sustainable growth and profitability. During the fiscal second quarter, the company completed a facility upgrade that will significantly enhance productivity and margins in the EFCO business.

The company is also striving to improve profitability across the entire Framing Systems segment and has taken steps to increase supply-chain integration, reduce procurement costs, and optimize facility footprint. It has also invested in a new facility located in Texas that will be focused on the short lead-time segment of the architectural glass market.

Apogee’s segments have the potential to increase market share, expand into new geographies and markets, and introduce fresh products. The North American commercial construction markets will grow throughout fiscal 2020. In particular, office and institutional building segments show promise, both of which are core markets for Apogee.

Hurdles to Counter

Apogee is likely to incur higher start-up costs for the new Architectural Glass growth initiative, which may impact the company’s margins in fiscal 2020. Further, the segment’s revenues have been affected by a stronger U.S. dollar. In addition, due to the project timing delays, revenues in the Architectural Services segment will be lower in fiscal 2020. Margins in the segment might be affected by lower volumes and lesser favorable project maturity compared with fiscal 2019 levels. Also, costs associated with the implementation of the supply-chain projects will drag down the Architectural Framing Systems segment’s margins in the fiscal third quarter.

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