Foolish Forecast: Apogee Rising

For two years straight, glassmaker Apogee Enterprises (Nasdaq: APOG  ) has never missed an earnings estimate. Can the company make it three years in a row? We'll get the first clue to that answer tomorrow afternoon, when the company reports its fiscal second-quarter 2007 numbers.

What analysts say:

  • Buy, sell, or waffle? Only two analysts follow little Apogee, but both give it their highest buy ratings.
  • Revenues. On average, they expect to see Apogee report 13% year-over-year sales improvement, at $195.8 million.
  • Earnings. And 25% better profits, at $0.25 per share.

What management says:
SEC filings reveal little news from Apogee since its fiscal first-quarter 2007 earnings results came out (read about them here). Running over the highlights, CEO Russell Huffer called Q1 "a good start to fiscal 2007," and promised "strong earnings growth" in the remaining three quarters. That said, Apogee was already expecting strong growth, and Huffer would only venture to confirm previous guidance of $0.88 to $0.94 per share in profits for this year. In contrast, Huffer nearly doubled his prediction on sales growth, from the previous expectation of about 7% to the current figure of roughly 13%.

Better sales growth, but no corresponding bump in profits expectations -- what gives? Huffer made a point of praising the firm's flagship architectural glass segment for driving growth in both sales and margins, but was forced to admit that Apogee's large-scale optical and auto glass segments were still struggling. At last report, Huffer thought the best we could expect to see out of these two units would be flat revenues versus last year (and apparently, worsening margins that will offset margin improvements in architectural).

What management does:
Over the last 18 months, Apogee's margins have remained strong, with gross margins sitting comfortably above 18%, and operating and net margins both inching upwards.

Margins %

2/05

5/05

8/05

11/05

2/06

6/06

Gross

18.1

18.2

18.4

18.2

18.7

18.4

Op.

3.6

4.0

4.5

4.4

4.8

5.0

Net

2.6

2.7

2.8

3.2

3.4

3.4

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
As I mentioned back in July, my primary concern about Apogee, as an investment, is that the firm doesn't put out a whole lot of free cash flow in support of its net income as reported under GAAP. In fact, this year, I wouldn't expect the firm to generate any positive free cash flow at all. Using the analysts' highest estimates of 25% profits growth as a proxy for free cash flow, I calculate that the firm will generate at most $42 million in operating cash flow this year. But according to Huffer, the firm intends to spend $40 million to $45 million on capital expenditures this year.

Granted, half of that will be "expansion capex" -- expenditures used to build the business, and specifically to construct a new architectural glass factory -- rather than "maintenance capex" (expenditures that must be made just to keep the business running). Still, whatever the capex flavor of the year, it looks likely to suck up all the firm's operating cash, and to reduce free cash flow for fiscal 2007 to zero.

With this result essentially a fait accompli, I'm personally resigned to it, and just hoping the firm's investment today pays off in free cash flow tomorrow (i.e., in the years after the new plant goes online). So tomorrow, I'll primarily look for news that this won't be the case -- that Apogee intends further capital expansion. Absent such news, I can wait a year for the cash to start flowing again.

Competitor:

  • PPG Industries (NYSE: PPG  )

Want a clearer picture of the glassmaker? Peer through:

PPG Industries is aMotley Fool Income Investorrecommendation. Try Mathew Emmert's dividend-driven premium investing newsletter service free for 30 days.

Fool contributorRich Smithdoes not own shares of any company named above. The Motley Fool has a crystal-clear disclosure policy.


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