Shares of leading environmental and safety solutions provider Federal Signal (FSS 18.43%) rose 22% as of 12 p.m. ET on Wednesday, according to data provided by S&P Global Market Intelligence. The company reported second-quarter earnings where sales, orders, and adjusted earnings per share (EPS) rose by 15%, 14%, and 23%, respectively.
This growth, paired with management's raised 2025 guidance for 12% revenue growth and 20% adjusted earnings-per-share (EPS) growth, sent the company's shares to new all-time highs.
Signaling future outperformance?
Federal Signal is a manufacturer that operates through two business segments -- its Environmental Solutions Group (ESG) and Safety and Security Group (SSG).
The ESG makes specialty equipment, such as street sweepers, road-marking vehicles, safe-digging trucks, and metal extraction support equipment, along with the aftermarket services that go with each. The SSG creates public-safety equipment, signaling products, and warning systems used in cop cars, emergency vehicles, and industrial-grade security systems.
Holding a No.1 or No. 2 market-share position across these niches, Federal Signal has been a 20-bagger since 2010. Over this time, it has become a successful serial acquirer, adding 13 complementary business lines since 2016.
Image source: Getty Images.
In March, I wrote about Federal Signal as a candidate to outperform, thanks to these qualities -- and its Q2 results back this notion. Perhaps the most intriguing part of the earnings report was the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) margins reaching an all-time high of 19.5%.
Despite the company reaching this new high, management raised its annual, through-the-cycle EBITDA target from 17% to 19%. This means that in their eyes, Q2's outsized profitability wasn't an outlier but closer to what Federal Signal can average over the long haul.
Trading at 37 times earnings, Federal Signal now holds a lofty valuation but is firing on all cylinders.
