Seeing Clearly at Apogee

Early yesterday evening, Apogee Enterprises (Nasdaq: APOG  ) reported strong earnings -- stronger than Wall Street had expected, at least. One would ordinarily expect a surge in stock price to accompany an "earnings beat" such as we saw last night. Instead, the stock is down more than 3% today, considerably worse than the market as a whole. Why?

Well, it's a combination of the pluses and minuses of the earnings report. Let's take a look at them, and see if Mr. Market is seeing clearly when it looks at this glassmaker and decides it needs a wash.

The good
Earnings came in a penny ahead of the consensus estimates at $0.26 per share, making for a 30% improvement over last year's second-quarter profits. What's more, gross margins increased 30 basis points to 18.7%, operating margins were up 120 basis points to 5.6%, and most of that improvement fell all the way to the bottom line, where net margins grew 70 basis points to 3.9%.

The bad
The bad news "headline" would have to be revenues, which grew considerably less than expected at just 9%. Although that could be taken as a good thing -- beating your profits expectations on lower-than-anticipated sales by definition means that margins improved (as shown above) -- Mr. Market is taking it as a sign of weakness in the business. Which brings us to .

The ugly
Apogee, while one company, has three divisions to it: architectural (glass used in commercial buildings), large-scale optical (glass used in framing and retail displays), and auto glass (used to replace cracked windshields, for example.) Of the three, only architectural turned in anything resembling a "strong" performance this quarter -- as has been the case for some time already -- with sales up 15% and operating profits more than doubling. Meanwhile, results at optical and auto were downright ugly. Their respective sales declines of 24% and 13% are to blame for the company's sales shortfall this quarter. At optical, a worsened product mix led to operating profits declining 62% year over year, despite getting a boost from $400,000 worth of a litigation settlement that Apogee booked in the quarter. Auto managed to break even this quarter, but only because of its own share of the settlement ($300,000).

Putting it all together, the good news at Apogee isn't really the earnings beat per se. It's that the firm's architectural glass business continues to grow strongly, is improving its margins, and is building up an order backlog -- and that architectural is the firm's largest unit by both sales and operating profits. As for the other two segments, they have their uses. In 2004, for example, when the architectural business was unprofitable, optical and auto helped to mitigate the damage in the firm's only money-losing year in the past decade. But now that architectural is back on track, I have to wonder whether the other two units' usefulness has come to an end.

Want a clearer picture of the glassmaker? Peer through:

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Fool contributorRich Smithdoes not own shares of any company named above.


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