Signal stock

Federal Signal Stock: A Solid Sign (NYSE:FSS)

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A year ago I concluded that Federal signal (New York stock market :NYSE: FSS) was a solid performer who seemed to be quite well liked. The company has had a strong operational performance in recent years, accompanied by targeted transactions, as these improved results have translated into strong equity price gains, helped in part by modest inflation in valuation multiples.

A bit of context

Federal Signal is a long-standing company that produces specialty equipment that includes street sweepers, sewer cleaners, safety and security products. The company has had a checkered past as it was a $25 stock in the 1990s but the stock fell to just $5 following the Great Recession of 2009 but even in the years to come , performance (share price) lagged. already.

After some portfolio reshuffling that began a decade ago, the company has seen a strong recovery. In 2017, Federal Signal acquired TBEI to expand its environmental solutions and with shares trading at $16, the call was seen as the deal could boost earnings to $1.20 per share.

The company has seen strong growth in the years since, and in early 2020 FSS reported 2019 revenue of $1.22 billion on which earnings of $1.79 per share were reported. reported, as these stronger earnings caused the stock to rise to the $30 mark at the start of 2020. In September of last year, when I took over Federal Signal coverage, the stock was trading at 39 $ per share.

The company announced a $52 million supplemental deal at the time, as the company maintained an earnings per share forecast of $1.79 for the year, with net debt of $167 million being roughly equal to reported EBITDA. The 61 million shares outstanding represented a stock valuation of $2.4 billion, or just over $2.5 billion in enterprise valuation, with the company trading at just over 2x the sales. Having been constructive at $16 in 2017, I saw neutral to fair at $39 in September of last year as I saw few short to medium triggers as stocks hit a low. market multiple.

Constant

After holding a neutral stance at $39 a year ago, shares hit the $50 mark at the end of the year, only to fall into the 30s in the spring of this year, with shares trading again at $39 per share. Needless to say, this marks no capital gains in a year.

In March of this year, Federal Signal announcement 2021 results with reported revenue up $1.13 billion to $1.21 billion as operating profit was flat at $131 million amid gross margin pressure. Adjusted earnings rose eight cents to $1.75 per share amid some smaller tweaks left and right. Net debt reached nearly a quarter of a billion following some transactions announced later in 2021, still very reasonable with EBITDA showing at $169 million and transactions resulting in an expected increase in 2022 results.

Initial outlook called for sales at a midpoint of $1.40 billion in 2022, with earnings between $1.76 and $2.00 per share, with earnings growth held back due to higher tax rates high expected. After the second quarter results report, Federal Signal raised its sales forecast to a midpoint of $1.415 billion, with earnings of between $1.85 and $2.00 per share. Net debt hit $295m, the result of a combination of capital expenditures, smaller M&As and modest share buybacks, still acceptable with EBITDA trending at $200m a year here.

With 61 million shares still trading at $39, the company’s valuation is stable around $2.6 billion, as 2022 has been a story of modest growth, albeit largely driven by transactions.

Another bolted deal

In September, Signal Federal announcement its next deal bolted in a deal to acquire TowHaul in a $46 million deal, aiming to bolster lineup of low-loader trailers, gooseneck equipment, draglines and trucks road counting.

The deal is very much a bolt-on deal, with the purchase price being less than 2% of the current valuation, as no financial details have been announced, while leverage is still very much under control.

Final Thoughts

Right now, Federal Signal continues to trade at a multiple of 20 based on this year’s earnings estimates, which seems fair, but given the lackluster market performance, it’s actually marking a small premium. compared to the wider market. With around 1.5x EBITDA leverage, this is still very manageable by all means.

The increase in valuation multiples is no doubt related to the market observation that Federal Signal has performed quite well in recent years, as well as the company’s improved positioning, with Federal Signal now operating the Environmental Solutions Group and Safety and Security Systems Group.

Despite these strong results, I reiterate my fair value rating as I did last year, as lackluster stock price performance against broader market declines caused Federal’s relative valuations to increased, although supported by a resilient performance since the start of the year. Nonetheless, the fair valuation argument prevails, as I greatly applaud Federal Signal’s performance, but am waiting for a higher level to get involved (again).