"Cost of Skyscraper Glass Hits Dizzying Heights."

It was the kind of headline tailor-made to set investor hearts aflutter. On Sept. 8, The Wall Street Journal broke the story of how "soaring" demand for commercial building window glass was sending prices through the roof -- and by express elevator. "Glass manufacturers and fabricators can't keep up," lamented the Journal. Glassmakers who might have been able to slake demand and put a ceiling on prices had gone bust in the Great Recession. That left only a few players still standing -- and little or no restraint on the prices they could charge.

To top it all off, one of the leading manufacturers of commercial building glass, Apogee Enterprises (NASDAQ:APOG), was poised to report Q2 earnings just one week later.

And now it has.

But the news is not good.

A nadir for Apogee
With seemingly every possible macroeconomic trend working in its favor, analysts expected big things out of Apogee's financial report last week -- and they weren't entirely disappointed. Operating profit margins expanded by 260 basis points to 9.3%, helping to push operating profit up 45% year over year. Profits per share increased 43% to $0.50, backlog grew 7%, and the company reaffirmed its earnings guidance for the full year.

On the other hand, revenues grew only 4%. And despite the greater backlogs, revenue guidance for the full year got knocked down from "10% to 15%" to a prediction of just "high single-digit growth" on concerns about project timing.

Apogee's explanation for the slow revenue growth was especially curious. According to management, "project timing" among construction projects it is servicing shifted to later in the year. But if it's true that glass supply troubles are what have been holding back construction projects among glass consumers, it doesn't make sense that Apogee -- the glass supplier -- would be the party affected by delays. If anything, you'd expect it to be the cause of other people's delays, as Apogee struggles to keep up with demand.

Indeed, Apogee's expressed intention of investing $50 million in capital spending this year "to increase capabilities, capacity and productivity" seems to suggest that Apogee is working hard to meet demand.

Yet even so, project delays do appear to be having an impact. Drilling down to Apogee's several business segments, we see that architectural glass (window glass) grew its revenues 10% year over year, while architectural framing systems -- the frames for Apogee glass -- grew a respectable 5%. Where Apogee's revenues fell short was in architectural services -- the division that installs the glass on construction and renovation projects. There, revenues were down a whopping 12%.

Whatever the ultimate reason for the slowdown, therefore, Apogee does appear to be telling it like it is: Construction -- not glass manufacturing -- has hit a bump in the road, and it's to blame for the weak revenue growth.

Valuation
Investors weren't at all pleased with this report, and to show it, they sliced 10% off Apogee's market cap in Friday trading. This leaves the stock trading for about 26 times earnings today, and for less than 18 times robust free cash flow. Ramping capital spending threatens to eat away at free cash flow over the second half of the year, however. But working off trailing FCF data from S&P Capital IQ, and assuming cash from operations holds up, $50 million in capital spending should still leave the company with $64 million or so in positive FCF by year end, and with a P/FCF ratio of about 22.

That might be appropriate if Apogee can (a) achieve the 22%-plus earnings growth it's promising for this year, and (b) repeat it in future years as well. Unfortunately, analysts only foresee 10% long-term earnings growth for Apogee over the next five years. And 26 times earnings, or even 22 times free cash flow, is probably a bit too much to pay for that kind of modest, unremarkable growth rate.

Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 261 out of more than 75,000 rated members.

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