Federal Signal: A Stock Worth Cleaning Up Your Portfolio With

Federal Signal Corporation designs and manufactures specialized equipment for municipal, government, industrial, and commercial clients. Their products include sewer cleaners, street sweepers, emergency vehicle lighting, sirens, and public safety communications equipment. The company operates with two segments: Environmental Solutions Group and Safety and Security Systems Group.

Federal Signal Corporation (NYSE: FSS), a leading designer and manufacturer of specialized equipment for municipal, government, industrial, and commercial clients, has demonstrated remarkable financial performance and growth prospects. The company's products include sewer cleaners, street sweepers, emergency vehicle lighting, sirens, and public safety communications equipment. Operating with two segments—Environmental Solutions Group and Safety and Security Systems Group—Federal Signal has consistently outperformed the broader market over the past decade.

Financial Performance

Over the past decade, Federal Signal's stock has returned over 830%, with an annualized growth rate of approximately 25%. This impressive performance is driven by a robust revenue growth trajectory. The revenue per share (RPS) has nearly tripled since 2016, rising from $11.6 per share to over $30 per share in recent years. This growth was consistent until the pandemic, with RPS declining slightly in 2020 but rebounding strongly in 2021. The RPS continued to grow in 2022 and 2023, with a 16% increase each year, and is projected to grow by 13.35% in 2024 [1].

Gross Profit Margin and Return on Invested Capital

The company's gross profit margin (GPM) has shown a steady upward trend over the past decade, rising from 17.8% in 2012 to 28.6% in 2023. This growth is attributed to increased aftermarket sales and strategic acquisitions, such as the recent acquisition of Hog Technologies in Q1 of 2023. The return on invested capital (ROIC) has also shown solid growth post-pandemic, with ROIC expected to reach 20% in the coming years, driven by synergies from acquisitions and strategic growth initiatives [1].

Dividend Policy

Federal Signal pays a quarterly dividend of $0.14 per share, equating to an annual dividend of $0.56 per share. The forward dividend yield is 0.45%, which is relatively low compared to other companies. However, the company has shown signs of regularizing its dividend increases, with consistent increases in the past two years. The declining payout ratio is a positive indicator that future dividend increases are likely [1].

Recent Earnings Report

In its Q2 2024 earnings report, Federal Signal exceeded analyst expectations by reporting normalized earnings per share (EPS) of $1.17, up from $1.06 in the same period last year. Revenue for the quarter was $565 million, a 15.3% year-over-year increase. The Environmental Solutions Group and Safety and Security Systems Group contributed to this growth, with the former segment's revenue increasing by 18% and the latter by 3% year-over-year. Management provided updated guidance for the year, with adjusted EPS expected to be between $3.92 and $4.10 per share, indicating a 20% year-over-year increase at the midpoint [1].

Valuation

Valuation metrics suggest that Federal Signal is trading for a moderate premium to its fair value. Using a custom free cash flow (FCF) valuation model, the current price of $125 per share is approximately 10% above the estimated fair value of $113 per share. The FCF has grown significantly over the past decade, with a 5-year compound annual growth rate (CAGR) of around 23%. The company's long-term expected rate of return is 13.48%, driven by a 0.45% dividend yield, a return to fair value factor of -1.92%, and an expected earnings growth rate of almost 15% [1].

Conclusion

Federal Signal Corporation has demonstrated exceptional financial performance and growth prospects over the past decade. With consistent revenue growth, improving gross profit margins, and strong earnings reports, the company is well-positioned for continued success. Although the stock is currently trading at a premium, its robust fundamentals and growth prospects suggest that it may be worth considering for long-term investors.

References

[1] https://seekingalpha.com/article/4811684-federal-signal-clean-up-your-portfolio-with-this-stock