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Safety and security company Federal Signal (NYSE:FSS) reported results in line with analysts' expectations in Q2 CY2024, with revenue up 10.8% year on year to $490.4 million. It made a non-GAAP profit of $0.95 per share, improving from its profit of $0.66 per share in the same quarter last year.
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Federal Signal (FSS) Q2 CY2024 Highlights:
- Revenue: $490.4 million vs analyst estimates of $487.4 million (small beat)
- EPS (non-GAAP): $0.95 vs analyst estimates of $0.84 (12.7% beat)
- Full year EPS (non-GAAP) guidance was raised to $3.28 at the midpoint, above expectations of $3.08
- Gross Margin (GAAP): 29.4%, up from 26.5% in the same quarter last year
- Free Cash Flow of $24.8 million, similar to the previous quarter
- Backlog: $1.08 billion at quarter end, up 7.3% year on year
- Market Capitalization: $5.78 billion
Developing sirens that warned of air raid attacks or fallout during the Cold War, Federal Signal (NYSE:FSS) provides safety and emergency equipment for government agencies, municipalities, and industrial companies.
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Sales GrowthA company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one tends to grow for years. Over the last five years, Federal Signal grew its sales at a decent 8.9% compounded annual growth rate. This shows it was successful in expanding, a useful starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Federal Signal's annualized revenue growth of 18.2% over the last two years is above its five-year trend, suggesting its demand recently accelerated.
We can better understand the company's revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Federal Signal's backlog reached $1.08 billion in the latest quarter and averaged 28% year-on-year growth over the last two years. Because this number is better than its revenue growth, we can see the company accumulated more orders than it could fulfill and deferred revenue to the future. This could imply elevated demand for Federal Signal's products and services but raises concerns about capacity constraints.
This quarter, Federal Signal's year-on-year revenue growth clocked in at 10.8%, and its $490.4 million of revenue was line with Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 6.6% over the next 12 months, a deceleration from this quarter.
Operating MarginRead More Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Federal Signal has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 12.2%. This was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it's a show of strength if they're high when gross margins are low.
Analyzing the trend in its profitability, Federal Signal's annual operating margin rose by 2.6 percentage points over the last five years, showing its efficiency has improved.
This quarter, Federal Signal generated an operating profit margin of 16.5%, up 3.1 percentage points year on year. This increase was encouraging, and since the company's operating margin rose more than its gross margin, we can infer it was recently more efficient with its general expenses like sales, marketing, and administrative overhead.
EPSRead MoreWe 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. Federal Signal's EPS grew at a spectacular 16.8% compounded annual growth rate over the last five years, higher than its 8.9% annualized revenue growth. This tells us the company became more profitable as it expanded.
We can take a deeper look into Federal Signal's earnings to better understand the drivers of its performance. As we mentioned earlier, Federal Signal's operating margin expanded by 2.6 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Federal Signal, its two-year annual EPS growth of 39.4% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.
In Q2, Federal Signal reported EPS at $0.95, up from $0.66 in the same quarter last year. This print easily cleared analysts' estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Federal Signal's EPS of $3.24 in the last year to stay about the same.
Key Takeaways from Federal Signal's Q2 Results It was great to see Federal Signal's strong full-year EPS forecast, which was raised and now is above analysts' expectations. We were also excited its EPS outperformed Wall Street's estimates. On the other hand, its backlog missed. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on track. The stock remained flat at $94.53 immediately after reporting.
