Building products manufacturer Simpson (NYSE:SSD) met Wall Street’s revenue expectations in Q3 CY2024, with sales up 1.2% year on year to $587.2 million. Its GAAP profit of $2.21 per share was 7.8% below analysts’ consensus estimates.

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"Our third quarter net sales of $587.2 million were up modestly year-over-year despite the housing markets in both the U.S. and Europe remaining under pressure," commented Mike Olosky, President and Chief Executive Officer of Simpson Manufacturing Co.

Company Overview

Aiming to build safer and stronger buildings, Simpson (NYSE:SSD) designs and manufactures structural connectors, anchors, and other construction products.

Home Construction Materials

Traditionally, home construction materials companies have built economic moats with expertise in specialized areas, brand recognition, and strong relationships with contractors. More recently, advances to address labor availability and job site productivity have spurred innovation that is driving incremental demand. However, these companies are at the whim of residential construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates. Additionally, the costs of raw materials can be driven by a myriad of worldwide factors and greatly influence the profitability of home construction materials companies.

Sales Growth

Reviewing a company’s long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one sustains growth for years. Over the last five years, Simpson grew its sales at an exceptional 14.4% compounded annual growth rate. This shows it expanded quickly, a useful starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Simpson’s recent history shows its demand slowed significantly as its annualized revenue growth of 3.8% over the last two years is well below its five-year trend.

This quarter, Simpson grew its revenue by 1.2% year on year, and its $587.2 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 5.2% over the next 12 months, an acceleration versus the last two years. While this projection illustrates the market believes its newer products and services will fuel better performance, it is still below the sector average.

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Operating Margin

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling them, and, most importantly, keeping them relevant through research and development.

Simpson has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 21.6%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Simpson’s annual operating margin might have seen some fluctuations but has generally stayed the same over the last five years, highlighting the long-term consistency of its business.

This quarter, Simpson generated an operating profit margin of 21.3%, down 3 percentage points year on year. Since Simpson’s operating margin decreased more than its gross margin, we can assume it was recently less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Earnings Per Share

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.

Simpson’s EPS grew at an astounding 21.8% compounded annual growth rate over the last five years, higher than its 14.4% annualized revenue growth. However, this alone doesn’t tell us much about its day-to-day operations because its operating margin didn’t expand.

Diving into the nuances of Simpson’s earnings can give us a better understanding of its performance. A five-year view shows that Simpson has repurchased its stock, shrinking its share count by 5.5%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business. For Simpson, its two-year annual EPS declines of 2.8% mark a reversal from its (seemingly) healthy five-year trend. We hope Simpson can return to earnings growth in the future.

In Q3, Simpson reported EPS at $2.21, down from $2.43 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Simpson’s full-year EPS of $7.57 to grow by 16.8%.

Key Takeaways from Simpson’s Q3 Results

We struggled to find many strong positives in these results. Its EPS and EBITDA missed Wall Street's estimates. It also lowered its full-year operating margin guidance. Overall, this was a bad quarter. The stock remained flat at $185 immediately following the results.

Simpson may have had a tough quarter, but does that actually create an opportunity to invest right now?We think that the latest quarter is just one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy.We cover that in our actionable full research report which you can read here, it’s free.