I have spent a lot of time over the last few weeks fighting wildfires near my home in Prescott, Ariz. About a month ago, one of my colleagues in the fire department told me he bought shares in Federal Signal (NYSE:FSS). It is the one public company I could find that derives a significant portion of its revenue from selling fire-fighting equipment.
Federal Signal is a small conglomerate with four divisions. In addition to the Fire Rescue Group, there are also Environmental Products, Tools, and Safety Products divisions. If you take the time to look at all of its products and divisions, you are unlikely to recognize any of its brand names, but it does make just about everything we have on our fire trucks. Not to mention the fire-resistant Nomex clothing that all wildland firefighters wear when fighting blazes.
Federal Signal also makes street sweepers, industrial vacuum loaders, sirens, flashing lights, solutions for handling hazardous materials, precision tools, and boron-cutting tools. This is about as boring a company as there is.
The fundamentals seem to indicate the stock is fairly priced. The forward P/E is 15.9, which is a slight discount to the market, and revenue grew at 14% last year but is only expected to grow slightly this year. The stock trades at a price-to-sales ratio of 0.73, which is cheaper than the sector.
Additionally, shareholders benefit from a 2.25% yield. Lastly, there have only been 1,000 shares sold by insiders over the last six months.
The lack of substantial predicted growth for the year is troubling. Federal Signal also has weak margins and a low return on equity compared to the sector. A quick peek at a long-term chart shows that the stock has traded in a range of the mid-teens to the mid-twenties for the last 10 years. That's a long time for no real price appreciation.
A crucial part of successful stock selection is picking stocks that have visible catalysts that will improve the company's fortunes, and hopefully, its share price, as well. Federal Signal has a couple of different catalysts; the Southwest is in a nasty drought that is causing more wildfires, and haz-mat needs are always increasing.
While the importance of either of these events is arguable, neither one has been able to lift the stock price in the past, and they are the most compelling potential boosts I can come up with. While I would love to invest in a company whose products are so important to what I do, I can't draw any conclusion that makes me think Federal Signal has a shot of outperforming the market from here.
Fool contributor Roger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At press time, neither he nor his clients owned any of the stocks mentioned.
