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 16.9% over the last two years is above its five-year trend, suggesting its demand recently accelerated.

Federal Signal also reports its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Federal Signal’s backlog reached $1.03 billion in the latest quarter and averaged 19.6% 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 revenue grew 6.2% year on year to $474.2 million, missing Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 7.1% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and illustrates the market believes its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

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Operating Margin

Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

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 12.4%. This result 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 well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Federal Signal’s annual operating margin rose by 3.3 percentage points over the last five years, showing its efficiency has improved.

This quarter, Federal Signal generated an operating profit margin of 16%, up 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.

 

Earnings Per Share

Analyzing 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.

Federal Signal’s EPS grew at a remarkable 13.6% 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.

Diving into the nuances of Federal Signal’s earnings can give us a better understanding of its performance. As we mentioned earlier, Federal Signal’s operating margin expanded by 3.3 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 analyze EPS over a shorter period to see if we are missing a change in the business.

For Federal Signal, its two-year annual EPS growth of 33.9% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q3, Federal Signal reported EPS at $0.88, up from $0.71 in the same quarter last year. This print beat analysts’ estimates by 5.3%. Over the next 12 months, Wall Street expects Federal Signal’s full-year EPS of $3.21 to grow by 9.7%.

Key Takeaways from Federal Signal’s Q3 Results

We were impressed by Federal Signal’s optimistic full-year EPS forecast, which blew past analysts’ expectations. We were also excited its EBITDA outperformed Wall Street’s estimates. On the other hand, its backlog missed and its revenue fell short of Wall Street’s estimates. Overall, this was a mixed quarter. The stock remained flat at $84 immediately following the results.

The latest quarter from Federal Signal’s wasn’t that good. One earnings report doesn’t define a company’s quality, though, so let’s explore whether the stock is a buy at the current price. The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.