Fasteners Are In High Demand
Simpson Manufacturing Company (NYSE: SSD), like its competitor Fastenal (NASDAQ: FAST), is emerging as a sleeper-win in the post-pandemic age. The pandemic has people staying home, staying home has people fixing up their homes, fixing up homes means trips to Home Depot (NYSE: HD) and Lowes (NYSE: LOW) for supplies and invariably those supplies include fasteners. Fasteners don’t sound like a great category to be sure but it includes things like nails, screws, and glue so one not to be ignored. Everybody needs fasteners for something.
This is not the first time a company well-positioned for stay-at-home trends has been overlooked or underestimated by the analysts. If I’ve seen it once, I’ve seen it at least a dozen times this reporting cycle. The analyst’s estimates were just too low. So low, in fact, I have to wonder it they were even paying attention. For Simpson, this means a substantial beat on the top and bottom line that points to 1) a solid beat for the full year 2) a round of upward revisions 3) and higher share prices.
The Analysts Just Weren’t Paying Attention
So, results for the quarter are this. Revenue of $326.10 million grew 7.0% on a YOY basis and beat consensus by 30%. Not 30 basis points, 30%. On a segment basis, weakness in Europe was offset by strength in North America. European revenue fell nearly -14.5% due to COVID-related shutdowns and decreased demand while it surged in North America by 10.75%. North American sales were aided by the return of Lowes as a client, a move that opens the door to 100’s of thousands of consumers.
Moving down, gross margins increased by 190 basis points on the combination of rising volume and lower expenses. Income from operations increased by 34.6% driving a 38.6% increase in earnings. GAAP earnings of $1.22 beat the consensus by $0.71 putting the company on track to soundly beat the current full-year consensus. And that doesn’t include the company’s guidance. CEO Karen Colonias says Simpson is on track to deliver positive revenue growth in 2020 versus the consensus estimate of -6.0%. Bottom line, the analysts are about to raise their guidance and targets, they have no choice.
“Looking ahead, we believe the solid demand trends we experienced in the second quarter of 2020 from the addition of Lowe's and improved repair and remodel market will continue, offsetting the expected weakness in the housing market. As a result, we expect our full-year net sales and gross margin will improve year-over-year in 2020 subject to circumstances outside of our control related to the COVID-19 pandemic.”
The Dividend And Balance Sheet Are Things Of Beauty
Don’t get me wrong, Simpson Manufacturing is no high-yielding stock. What it is, is a 1.0% yielding dividend-grower with the strongest balance sheet I have ever seen. The company has loads of cash, virtually no debt, and a coverage ratio of 50. I have no doubt this company can pay its dividend and raise the distribution any time it wants to.
The caveat is that Simpson paused its hiking cycle this year when COVID struck. The company did not decrease the yield and there is every expectation of future increases which means yet another catalyst for share prices some time down the road. Until then, investors can rest assured that the payout is safe regardless of what happens with share prices.
The Technical Outlook: On The Verge Of Breaking Out
The chart of Simpson looks pretty good. The company corrected in February and March along with the broad market and staged a strong rebound since. Share prices broke to a new high in early June, retreated back to support, and are now moving higher again. With the stock pushing up against resistance at the all-time high the next moves are going to be important. A break to new high will confirm the bullish outlook and the uptrend, a confirmation of resistance could lead to another correction.
In the first scenario, the one I think more likely, share prices could easily gain $20 to $40 over the next 6 to 8 months. Assuming of course that business continues to improve as it is expected to do. In the second scenario, it is possible the market could find support at the $90, $84 or $80 levels.
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