By:
Michael Robinson, AIM Student at Marquette
University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary:
• Federal Signal Corporation (NYSE:FSS) designs and manufactures
integrated solutions and products for governmental, municipal, industrial, and
commercial customers. They operate in two segments: Safety and Security Systems
Group and Environmental Solutions Group (ESG). The Safety and Securities
segment is a manufacturer and supplier of comprehensive systems used to protect
people and property by law enforcement, fire recuse, and military facilities.
The ESG segment supplies street sweepers, vacuum trucks, and water blasting
equipment for municipal and industrial customers. Federal Signal was founded in
1901 and is headquartered in Oak Brook, IL.
• Earlier this month,
Federal Signal reported their quarterly earnings and the stock price rose 28%.
• FSS completed the
acquisition of Joe Johnson Equipment in early June. The expectations were that
the acquisition would boost sales. The third quarter’s sales were up $7 M over
the same period last year.
• The Environmental
Solutions Group led the charge with total orders for the segment increasing by
$27.5 M compared to the same period last year.
• FSS’s Board of
Directors announced that the Executive Chairman of the Company, Dennis Martin,
will retire at the end of the calendar year.
Key
points:
The booming increase in
the ESG segment was fueled by the acquisition of Joe Johnson Equipment. The
acquisition of the Canadian rental agency caused Canadian orders to increase.
The Safety and Securities segment decreased sales by $9.6M but that was not
enough to offset the $27.5M increase from the ESG segment. Overall sales went
up 11% for the quarter compared to the quarter last year.
U.S. municipal and
governmental orders increased by 4% with a $3.4 M increase in orders for sewer
cleaners. U.S. industrial orders increased by 9%. This increase is related to
orders of the newly acquired product lines from Joe Johnson Equipment. Non-U.S.
orders increased by 24%. This increase was mostly concentrated in Canada and
due to the acquisition. The large increases in orders were focused in the ESG
segment.
Because of the increase
in ESG sales, Federal Signal’s backlog is significantly reduced, moving from
$179.3 M in 2015 to $148.7 M in 2016, a 17% decrease. The lower backlog is due
to the increase in ESG sales and the decrease in demand for vacuum trucks,
street sweepers, and sewer cleaners.
What
has the stock done lately?
Since the earnings
release on November 1, Federal Signal’s stock price has risen 29.04%. This
large jump in the last month is great for the company, which has had a very
stagnant stock price for the past 6 months
Past
Year Performance:
Federal Signal started
the year at $15.25. It is currently at $15.24. The stock has not done much over
this past year. The large 24% drop in early March was corrected by the 30% rise
in this past month. The stock price has fluctuated slightly over the year but
has remained pretty consistent.
Source: FactSet
My
Takeaway:
The company has not had a
record setting year. Ending the year at almost the exact same stock price that
they started at may not look good for 2016. I do believe that the company’s
earnings beat in the last quarter signals a positive future for the next few
years. It shows that the company is benefiting from the acquisition of Joe
Johnson Equipment and the future growth of sales is looking up. Since it was
pitched the stock is up 14%. The stock has not reached its price target yet and
I see room for even more upside. Therefore, I recommend that FSS should stay in
the AIM Portfolio.
