Wednesday, November 30, 2016

An AIM Fund holding: Federal Signal Corp (FSS) by Mike Robinson: “FSS Signals Positive Growth Moving Forward"

Federal Signal Corporation (FSS, $15.26): “Federal Signal Signals Positive Growth
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.

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.