Stock Story -
Safety and specialty services provider APi (NYSE:APG) fell short of analysts' expectations in Q2 CY2024, with revenue down 2.3% year on year to $1.73 billion. Next quarter's revenue guidance of $1.89 billion also underwhelmed, coming in 2.1% below analysts' estimates. It made a non-GAAP profit of $0.49 per share, improving from its profit of $0.41 per share in the same quarter last year.
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APi (APG) Q2 CY2024 Highlights:
- Revenue: $1.73 billion vs analyst estimates of $1.79 billion (3.3% miss)
- EPS (non-GAAP): $0.49 vs analyst estimates of $0.47 (4% beat)
- Revenue Guidance for Q3 CY2024 is $1.89 billion at the midpoint, below analyst estimates of $1.93 billion
- The company lifted its revenue guidance for the full year from $7.15 billion to $7.25 billion at the midpoint, a 1.4% increase
- EBITDA Guidance for the full year is $900 million at the midpoint, in line with analysts' expectations
- Gross Margin (GAAP): 31.4%, up from 28% in the same quarter last year
- Free Cash Flow of $88 million is up from -$15 million in the previous quarter
- Organic Revenue fell 3.1% year on year (7.6% in the same quarter last year)
- Market Capitalization: $10.39 billion
Started in 1926 as an insulation contractor, APi (NYSE:APG) provides life safety solutions and specialty services for buildings and infrastructure.
Construction and Maintenance ServicesConstruction and maintenance services companies not only boast technical know-how in specialized areas but also may hold special licenses and permits. Those who work in more regulated areas can enjoy more predictable revenue streams - for example, fire escapes need to be inspected every five years–. More recently, services to address energy efficiency and labor availability are also creating incremental demand. But like the broader industrials sector, construction and maintenance services companies are at the whim of economic cycles as external factors like interest rates can greatly impact the new construction that drives incremental demand for these companies’ offerings.
Sales GrowthA company's long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Thankfully, APi's 12.1% annualized revenue growth over the last five years was excellent. This is encouraging because it shows APi's offerings resonate with customers, a helpful starting point.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. APi's annualized revenue growth of 14.1% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.
APi also reports organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don't accurately reflect its fundamentals. Over the last two years, APi's organic revenue averaged 5% year-on-year growth. Because this number is lower than its normal revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline performance.
This quarter, APi missed Wall Street's estimates and reported a rather uninspiring 2.3% year-on-year revenue decline, generating $1.73 billion of revenue. The company is guiding for revenue to rise 5.7% year on year to $1.89 billion next quarter, improving from the 2.8% year-on-year increase it recorded in the same quarter last year. Looking ahead, Wall Street expects sales to grow 8.9% over the next 12 months, an acceleration from this quarter.
Operating MarginAPi was profitable over the last five years but held back by its large expense base. It demonstrated lousy profitability for an industrials business, producing an average operating margin of 2.3%. This result isn't too surprising given its low gross margin as a starting point.
On the bright side, APi's annual operating margin rose by 15 percentage points over the last five years, as its sales growth gave it immense operating leverage
In Q2, APi generated an operating profit margin of 7.3%, up 1.2 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.
EPSWe track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
APi's EPS grew at a decent 9.5% compounded annual growth rate over the last five years. Despite its operating margin expansion during that time, this performance was lower than its 12.1% annualized revenue growth. This tells us non-fundamental factors affected its ultimate earnings.
We can take a deeper look into APi's earnings quality to better understand the drivers of its performance. APi recently raised equity capital, and in the process, grew its share count by 58.7% over the last five years. This has resulted in muted earnings per share growth but doesn't tell us as much about its future. We prefer to look at operating and free cash flow margins in these situations.
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For APi, its two-year annual EPS growth of 18.8% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.
In Q2, APi reported EPS at $0.49, up from $0.41 in the same quarter last year. This print beat analysts' estimates by 4%. Over the next 12 months, Wall Street expects APi to grow its earnings. Analysts are projecting its EPS of $1.75 in the last year to climb by 17.1% to $2.05.
Key Takeaways from APi's Q2 Results It was good to see APi beat analysts' EPS expectations this quarter. We were also glad its full-year revenue guidance came in higher than Wall Street's estimates. On the other hand, its revenue unfortunately missed and its organic revenue fell short Wall Street's estimates. Overall, this quarter was mixed. The stock remained flat at $37.89 immediately after reporting.
