Back in September, glass specialist Apogee Enterprises (NASDAQ:APOG) fell short of its first earnings estimate in 10 straight quarters, putting an end to what was looking like a three-year winning streak. Can the company get back up on the horse when it reports its third-quarter 2007 numbers on Wednesday?

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 15% year-over-year sales improvement, at $203.7 million.
  • Earnings. Profits, in contrast, are expected to fall 16% to $0.27 per share.

What management says:
Some six months ago, CEO Russell Huffer called Q1 "a good start to fiscal 2007," and promised "strong earnings growth" in the remaining three quarters of this year. Last month, he re-upped on that promise by raising earnings guidance for Q3. Having previously guesstimated that earnings would come in between $0.88 and $0.94, Huffer's new prediction of $0.92 to $0.98 per share raises the bar roughly 4%.

What's behind the hike? You guessed it: The firm's architectural business continues to exceed expectations. Also good to hear was that the firm "slightly increased our outlook potential for the large-scale optical segment."

What management does:
Also helping boost profits, I suspect, are Apogee's continued efforts to control operating costs. Over the last six months, growth in the cost of goods sold has slightly outpaced sales growth, keeping the rolling gross margins flat. Meanwhile, operating costs are up just 1% year over year, resulting in rising operating and net margins.

Margins %

5/05

8/05

11/05

2/06

6/06

9/06

Gross

18.2

18.4

18.2

18.7

18.4

18.4

Op.

4.0

4.6

4.4

4.8

5.0

5.3

Net

2.7

2.8

3.2

3.4

3.4

3.6
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:
Apogee is going to need to keep those costs under control if it's to continue expanding profits, because the company's sales prognosis doesn't look good. At the same time as it raised earnings guidance, it backed down its expected sales growth to 12%-15% for the full year, shaving one to two percentage points off of the booming architectural glass segment, and confirming that auto glass sales will come in at the very bottom of previous guidance, down 10% year over year. All of which means Apogee will have to squeeze extra profits out of the sales it does make, to keep profits growing.

One final note, related to my past comments on Apogee's free cash flow: With the auto glass segment flailing, Apogee intends to "transition the auto replacement windshield portion of our auto glass segment to support architectural glass fabrication." On the one hand, that speaks to a more efficient use of the firm's fixed assets. On the other, I suspect such a transition will require at least some retooling, meaning more capital expenditures than we had previously expected, and lower free cash flow in the short term.

Competitors:

  • PPG Industries (NYSE:PPG)

What did we expect to see at Apogee last quarter, and what did it produce? Find out in:

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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.