Simpson Manufacturing Builds Value For Investors
Simpson Manufacturing (NYSE: SSD) is a growth story that has legs and one that offers more than just growth for investors. On the one hand, CEO Karen Colonias has been diversifying the company into five distinct end-use markets and that diversification is proving its worth in more ways than one. On the other hand, Ms. Colonias is building on a history of sound capital management and capital returns to shareholders that was put in place more than a decade ago. What this means for investors is a high-probability candidate for capital appreciation, dividends, and dividend growth and a stock that could easily become a Dividend Aristocrat.
"We made progress on our key growth initiatives during the second quarter within each of our five end-use markets, including Residential, Commercial, OEM, National Retail, and Building Technology, which gives us the confidence we can continue our above-market growth relative to U.S. housing starts in fiscal 2022 and beyond … we identified facility expansions in the U.S. that will improve our overall service, production efficiencies and safety in the workplace, as well as reduce our reliance on certain outsourced finished goods and component products, and ensure we have ample capacity to meet our customers' needs,” said CEO Karen Colonias in the earnings release.
Simpson Manufacturing Narrowly Outpaces The Consensus Estimates
Simpson Manufacturing had a great quarter despite a narrow margin of outperformance relative to the analyst's consensus estimates. The company reported $593.23 million in net revenue for a growth of 44.6%, but it only beat the consensus by 230 basis points. However, the gains were driven primarily by pricing increases because North American volume was reported as flat, and volume was down in the EU. Regardless, the revenue is also driven by the addition of ETANCO in the EU segment, a segment that grew more than 135%, and demand was reported as strong.
Moving down to the earnings there is some more tepid news to be aware of. That news is a 420 basis point decline in the gross margin and a 240 basis decline in the operating margin that cut into the bottom line results. The good news, however, is that margin decline includes costs related to the ETANCO purchase, which did not fully offset the topline strength. The $2.16 in GAAP earnings is up 30.1% compared to the larger top-line growth, but it beat the consensus estimate by a much wider 850 basis point margin. The company does not give specific guidance for revenue or earnings. Still, it did indicate margin compression would continue into the end of the year with an operating margin in the range of 19% to 21%.
The takeaway for investors is that net income is up 30.1% on a YOY basis and is expected to grow. This fuels the dividend payment and a repurchase program that should extend beyond the current authorization. As it is, the stock is paying about 0.95% in yield, which is not that much, but it is backed up by an attractive 13% payout ratio and a sound balance sheet. The buyback program netted about 0.5% of the market cap in the 2nd quarter and has slightly more than half that amount left to go.
The Technical Outlook: Simpson Manufacturing Supported Within A Range
The price action in Simpson Manufacturing has been range-bound the last few quarters, and that situation has not changed. The price action appears to be well-supported within the range, but there is a risk of downward drift within it. The post-release action has the stock down 1.5% and trading at the short-term moving average, which would be a trigger point for selling. A move below the EMA could send the stock down to the bottom of the range, but if support is confirmed, the price action could move back to the top of the range near $120. 