Buy The Dip In Simpson Manufacturing
A Great Quarter For Simpson Goes Unrewarded
Shares of Simpson Manufacturing (NYSE: SSD) fell hard in the wake of Q3 earnings but not for the right reasons. It would be one thing if the company’s business was flagging, or if demand was failing, but it’s not. Simpson stock is moving lower for the wrong reasons and opening up what we view as another entry-point into a high-quality dividend grower.
You see, Simpson produced YOY revenue growth, margin expansion, and enhanced cash flow with only one flaw. The top line missed the consensus estimates and there are factors affecting performance that make the numbers less than comparable. The most obvious difference is that last year’s sales in the retail channels were bolstered by an inventory build at Lowe’s that didn’t happen this year. Regardless, the business is strong and the outlook for growth is positive.
“Our strong cash generation enabled us to invest $12.0 million for capital expenditures during the quarter as well as to pay $10.9 million in dividends and repurchase $24.1 million of Simpson common stock. While the macroeconomic landscape remains challenging for Simpson and its customers due to ongoing global supply chain constraints, limited steel availability and a tight labor market, we continue to deliver on the key elements of our business model to ensure we meet our customers' needs,” said Karen Colonias, CEO of Simpson Manufacturing.
Simpson Manufacturing Grows Revenue, Widens Margins
Simpson Manufacturing missed the Marketbeat.com consensus estimate for revenue by over 1100 basis points and that is no joke. The combined impact of tough comparisons, shifting mix in the retail segment, and supply chain hurdles are to blame. In North America, price increases were able to more than offset a slight decline in volume while in Europe both volume and price increases are at play. The good news, at least for Simpson, is that pricing increases have so far been able to outpace inflationary pressures and resulted in wider margins.
Moving down to the income portion of the report, the company was able to widen margin at both the gross and operating levels despite margin shrinkage in the EU segments. The gross margin came in at 49.6% or up 230 bps YOY while the operating margin rose a smaller 30 basis points to drive GAAP earnings up 10.4% over last year. The GAAP EPS missed the consensus as well, but by a much smaller margin than revenue, and left the company in solid shape financially. The company was already net-cash with a fortress balance sheet, that situation was improved during the quarter.
The Technical Outlook: Simpson Pulls Back To Support
Shares of Simpson Manufacturing fell more than 10% in intraday trading following the release of Q3 earnings. The move has the stock trading at a key support level at the bottom of a trading range where support is already showing itself. Price action confirmed support at the $105 level with a large doji candle that suggests some market indecision is still present. Price action may continue to move lower in the near term and test or retest support at the $105 level so investors should remain cautious with new money. The indicators are showing divergences that reinforce the idea of support at the current levels but bearish signals are still present in the near term.
If price action is unable to maintain support at the $105 level a move down to $100 and possibly as low as $90 becomes very likely. The analysts are bullish on this stock but, according to Marketbeat.com data , there is only one analyst with a rating that can be called current. That firm is Robert Baird and holds a price target of $135 or more than 20% upside for the stock.