For three years running, commercial glassmaker Apogee (NASDAQ:APOG) has consistently met or exceeded Wall Street's earnings expectations. As Apogee enters its new fiscal year, will Q1 continue the trend, or mark its demise?

What analysts say:

  • Buy, sell, or waffle? Only three analysts track little Apogee skyward. Two rate it a buy, and one a hold.
  • Revenues. On average, the analysts expect to see 6% sales growth, to $206.8 million.
  • Earnings. Profits, however, are predicted to leap 41% to $0.24 per share.

What management says:
CEO Russell Huffer pronounced himself "very pleased" with Apogee's results last quarter -- and last year. In both periods, the firm grew its sales 17% year over year. Meanwhile, full-year profits from continuing operations grew 29%, and grew even faster as the year progressed, with Apogee booking a 52% increase in profits from continuing ops in the fourth quarter. For the full story on Apogee's remarkable fiscal 2007, click here.

What management does:
17% sales growth is pretty impressive in and of itself. But to grow profits even faster than that, a firm must expand its profit margins on those sales -- and Apogee has. With only a few bobbles, the firm has kept its rolling gross, operating, and net margins rising ever higher over the last 18 months. Net result: Apogee is now about 28% more profitable per dollar of revenue than it was a year and a half ago.

Margins

11/05

2/06

6/06

9/06

12/06

3/07

Gross

18.2%

19.3%

18.4%

18.4%

18.5%

19.1%

Operating

4.5%

5.4%

5.0%

5.3%

6.1%

7.1%

Net

3.2%

3.6%

3.4%

3.6%

3.5%

4.1%
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:
If there's one thing that might concern a value-hunting Fool, I suspect it's the firm's meager flows of free cash. Last year, for example, Apogee's $6.8 million in free cash flow paled in comparison to the firm's $31.7 million in reported net profits. Granted, we understand the why of the disparity. Apogee is spending large sums to expand the capacity of its most successful business -- architectural glass -- and this investment in capital spending is eating up most of the firm's operating cash flow.

What do I think of this? Reviewing the firm's past financials, this massive investment in capex is a fairly recent phenomenon at Apogee. Three years ago, it was spending only a little more than a quarter of what it's now spending on infrastructure. Given a little more time, I suspect that Apogee's retooled business will eventually start pouring out free cash flow.

But on the other hand, Apogee's story appears to differ from that of other firms I've recently critiqued for generating little cash profit despite impressive GAAP financials. Wimm-Bill-Dann has tripled in value since I recommended it for the Fool's international investing report in March 2006. CarMax has done nearly as well for the Fool's Inside Value portfolio, after Philip Durell tapped it in January 2006.

Unlike those two firms, which rapidly grew their tangible book values in tandem with expanding capex, Apogee's tangible book value has grown at just a modest 10% rate, compounded over the last five years. Until I see similar improvement on Apogee's balance sheet, or increased free cash flow, I'll have to adopt a more skeptical stance on this firm, despite its superb GAAP earnings.

For more crystal clear analysis of the glassmaker's progress, read:

In addition to CarMax, want to see which other companies Philip Durell has recommended for Motley Fool Inside Value subscribers? Consider a free 30-day trial today.

Fool contributor Rich Smith does not own shares of any company named above.