Can Apogee Deliver on Its Full Potential?

By Markets Fool.com


Image source: Apogee Enterprises.

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Glass has been a vital material for millennia, and advances in glass technology have made this deceptively simple product increasingly useful over time. Apogee Enterprises (NASDAQ: APOG) has worked hard to develop high-end glass products that its customers use in building construction as well the optical industry and other applications. With Apogee set to report its fiscal second-quarter financial report on Wednesday, Sept. 14, investors in the glass specialist want confirmation that it can follow through on the upbeat guidance it gave three months ago. Let's take an early look at what Apogee Enterprises has been up to and whether it can sustain its positive momentum going forward.

Stats on Apogee Enterprises

Expected EPS Growth

34%

Expected Revenue Growth

11.3%

Forward Earnings Multiple

14.6

Expected 5-Year Annualized Growth Rate

10%

Data source: Yahoo! Finance.

Can Apogee earnings keep climbing higher?

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Investors have gotten more excited in recent months about Apogee's earnings prospects, boosting their full-year fiscal 2017 projections by more than a dime per share. The stock has also responded favorably, climbing by 8% since early June.

Apogee's fiscal first-quarter results set the stage for the greater optimism among its shareholders. The company reported only tepid sales gains, but earnings jumped by nearly half, and a reduction in headwinds related to foreign currency weakness played a vital role in helping Apogee's bottom line. The company also reported higher backlogs, and any concerns about falling revenue from the architectural glass segment were tempered by assurances that project-timing issues were temporary in nature. Guidance for double-digit sales growth and an increase in earnings projections produced a nice bump for the stock price after the report.

What's particularly impressive is that Apogee has managed to accomplish profit-enhancing initiatives even in a challenging sales environment. As the company's executives explained during Apogee's most recent conference call, the benefits from lower raw material costs have largely played out. But Apogee has done a good job of being more efficient in its factory operations. Moreover, Apogee has been more selective about the projects that it takes on, and that has resulted in stronger margin performance even when sales haven't produced the growth that investors would prefer to see.

What Apogee has to do

Still, not everyone is convinced that Apogee can continue to grow its earnings at its past rate. In July, analysts at Goldman Sachs downgraded Apogee from buy to neutral and also reduced their price target on the stock. Other investors following the stock have expressed concerns about the company's exposure to weak international economic conditions, especially in areas such as Brazil and Canada that have suffered from poor price performance in commodity markets like crude oil. For its part, Apogee has seen some weakness in markets exposed to the energy sector, but overall, it still believes that it has strong momentum that it can use to keep generating new projects into the future.

In the Apogee earnings report, investors will want to focus on how much more the company can squeeze from operational moves designed to enhance productivity. Already, the glass specialist has done a good job of making the most of tough conditions, but what it really needs in order to bolster its future growth is to find new sources of sales. Given the substantial uncertainty about global macroeconomic conditions and prospects for a worldwide economic rebound, it might be too soon to predict whether Apogee will see near-term growth or have to remain patient. Nevertheless, if Apogee can convince investors that it is well-positioned to take advantage of the next cyclical upturn in the global economy, then long-term shareholders are more likely to feel confident about the company's prospects in the long run.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Apogee Enterprises. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.