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Apogee Earns a Lot, but Where's the Cash?

By Rich Smith - Apr 14, 2013 at 3:45PM

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Answer: It's all sunk into capex, and with little growth to show for it.

I won't deny it: I've been a longtime fan of glassmaker Apogee Enterprises (APOG -0.44%). Years ago, when the company decided to forgo some revenue by exiting the market for automotive windshields and focus instead on making higher-margin glass for building windows and picture framing, I thought that was the right call.

I haven't been in the stock for a while, however, because Apogee first got caught up in a weak construction market (driving down sales) and then recovered faster than I expected (driving up the stock price). But now that things have settled down a bit, post-Financial Crisis, I'm taking a closer look at Apogee once again ... beginning with last week's fiscal 2013 earnings report.

So what has Apogee been up to lately? Here's a quick rundown:

  • Full-year sales through March 2 rose 6%, with strong architectural glass performance driving growth.
  • Cost of goods sold rose only 2%, leading to an improved gross profit margin.
  • Muted growth in selling, general, and administrative costs further helped to improve operating income, which surged 619% year over year.
  • Net profits nearly quadrupled to $0.67 per share, diluted.

Sound good so far? Great. Now, here's where it gets bad. A year ago, Apogee's weak GAAP net earnings number belied rather strong cash production at the company. Today, we're the reverse: Apogee's inflated GAAP net income overstates true cash profitability.

Free cash flow at Apogee for fiscal 2013 came to just $6 million, a mere one-third of the headline "net income" number. Consequently, even after last week's post-earnings 10% sell-off in the stock, Apogee looks seriously overvalued at today's prices. The company's 42 P/E ratio is only the beginning of the problem. Valued on free cash flow, Apogee now costs a staggering 125 times free cash flow.

Granted, Apogee's weak free cash flow owes largely to the fact that, as CEO Joseph F. Puishys noted, Apogee spent $35 million on capital investments to help drive "future growth." Sadly, though, that's the punchline to my fellow Fool Travis Hoium's analysis of Apogee's performance last week.

Crunching the numbers, Travis notes that "the company will need to continue to grow" to justify its share price. Unfortunately, analysts tracking the stock believe Apogee will be lucky to achieve grow its profits at even 7% per year over the next five years. That's not fast enough to justify the stock's valuation even if it spent nothing at all on capex.

It's not nearly enough to entice me back into the stock, either.

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