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Building products manufacturer Simpson (NYSE:SSD) missed analysts' expectations in Q2 CY2024, with revenue flat year on year at $597 million. It made a GAAP profit of $2.31 per share, down from its profit of $2.50 per share in the same quarter last year.
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Simpson (SSD) Q2 CY2024 Highlights:
- Revenue: $597 million vs analyst estimates of $607.9 million (1.8% miss)
- EPS: $2.31 vs analyst expectations of $2.48 (6.7% miss)
- Gross Margin (GAAP): 46.7%, down from 48.1% in the same quarter last year
- Market Capitalization: $7.64 billion
Aiming to build safer and stronger buildings, Simpson (NYSE:SSD) designs and manufactures structural connectors, anchors, and other construction products.
Home Construction MaterialsTraditionally, home construction materials companies have built economic moats with expertise in specialized areas, brand recognition, and strong relationships with contractors. More recently, advances to address labor availability and job site productivity have spurred innovation that is driving incremental demand. However, these companies are at the whim of residential construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates. Additionally, the costs of raw materials can be driven by a myriad of worldwide factors and greatly influence the profitability of home construction materials companies.
Sales GrowthReviewing a company's long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one tends to sustain growth for years. Over the last five years, Simpson grew its sales at an exceptional 14.9% compounded annual growth rate. This shows it expanded quickly, a useful starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Simpson's annualized revenue growth of 7.8% over the last two years is below its five-year trend, but we still think the results were respectable.
This quarter, Simpson missed Wall Street's estimates and reported a rather uninspiring 0.1% year-on-year revenue decline, generating $597 million of revenue. Looking ahead, Wall Street expects sales to grow 6.4% over the next 12 months, an acceleration from this quarter.
Operating Margin 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.
Simpson has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 21.5%. This isn't surprising as its high gross margin gives it a favorable starting point.
Analyzing the trend in its profitability, Simpson's annual operating margin rose by 2 percentage points over the last five years, showing its efficiency has improved.
This quarter, Simpson generated an operating profit margin of 22.1%, down 2.4 percentage points year on year. Since Simpson's operating margin decreased more than its gross margin, we can assume the company was recently less efficient because its general expenses like sales, marketing, and administrative overhead increased.
EPS Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Simpson's EPS grew at an astounding 24.2% compounded annual growth rate over the last five years, higher than its 14.9% annualized revenue growth. This tells us the company became more profitable as it expanded.
We can take a deeper look into Simpson's earnings quality to better understand the drivers of its performance. As we mentioned earlier, Simpson's operating margin declined this quarter but expanded by 2 percentage points over the last five years. Its share count also shrank by 5.7%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For Simpson, EPS didn't budge over the last two years, a regression from its five-year trend. We hope it can revert to earnings growth in the coming years.
In Q2, Simpson reported EPS at $2.31, down from $2.50 in the same quarter last year. This print missed analysts' estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Simpson to grow its earnings. Analysts are projecting its EPS of $7.79 in the last year to climb by 13.8% to $8.86.
Key Takeaways from Simpson's Q2 Results We struggled to find many strong positives in these results. Its EPS missed and its revenue fell short of Wall Street's estimates. Overall, this quarter could have been better. The stock traded down 6% to $170 immediately following the results.
