Credit: Shutterstock photoD uring the 30-plus years that he spent at other jobs before becoming CEO of Apogee Enterprises, Joe Puishys learned a lot of important lessons, including the value of reducing your company's exposure to macro trends.
That lesson comes in especially handy atApogee ( APOG ), which designs, develops and sells glass products, services and systems. The company operates in four segments: Architectural Glass, Architectural Framing Systems, Architectural Services and Large-Scale Optical (LSO) Technologies.
The first three of those segments are exposed to highly cyclical end markets such as commercial construction. The other, LSO Technologies, makes glass and acrylic products for the much less cyclical custom picture framing market.
Commercial construction markets in the U.S. have done pretty well over the past few quarters.
That's good news for Apogee's architectural segments, whose products and services include the glass used in a building's windows and outer skin, or curtain wall; the aluminum frames for a building's curtain wall, storefront and entrance systems; and the design, engineering and fabrication of most of the metal systems that Apogee installs.
"Last year we had a lot of help from the end markets for commercial construction," Puishys told IBD. "Our end markets grew about 10% in 2014. We expect similar numbers for 2015 and also expect continued tailwinds in commercial construction over the next three years."
Diversified Business
But Apogee doesn't want to rely solely on favorable macro trends to attain its growth targets, says Puishys, who previously served as president of a couple of differentHoneywell International ( HON ) divisions.
"We were trained at Honeywell not to be constrained by macro trends, so we spread our risk factors around," he said. "When I came to Apogee (in August 2011), I felt we should not be too dependent on commercial construction for our growth."
To help reduce its dependency on U.S. commercial construction markets, and to diversify its business, Apogee has put a big focus on new product development, new end markets and new geographies.
"You really need a three-year horizon of products to add to your portfolio to be competitive," Puishys said.
Apogee measures its success at introducing new products through a vitality index, or VI. The VI tells you the percentage of revenue that your business is generating from products released during the previous three years.
"In the consumer electronics business, you might want a VI of 100% -- all of your revenue should come from products introduced in the last three years," Puishys said. "But in most of our businesses, something in the 20% to 25% range is appropriate."
Each of Apogee's businesses now has a VI target to reach. In some cases the target might be less than 10%, while in others it might be in the mid-20% range.
New product ideas cover a range of applications. They include stronger glass systems to meet hurricane-resistance standards as well as new technologies that can make a glass exterior darker when the bright sun hits and lighter when the sun fades away.
"The development process comes from many factors -- from our customers, from our customers' architects, from looking at competitors to find holes in our current portfolio," Puishys said. "You have to keep your eyes and ears open."
Planning Ahead
Apogee also works hard to establish a large backlog of future business. During its fiscal 2015 third quarter, which ended in November, the company had a backlog of $493.9 million. That was up 65% from the prior year and 3% sequentially.
In a research note after the Q3 earnings report, analyst Brent Thielman of D.A. Davidson said that Apogee's visibility extends beyond just its current backlog.
The company also "works closely with architects/building owners for proposed projects years out," Thielman noted. "This provides a unique view into the prospective project pipeline."
In terms of new end markets, Apogee has already diversified its business with its LSO Technologies segment. This segment sells different types of picture-frame products -- including anti-reflective glass and glass with ultraviolet (UV) protection -- to retailers of arts, crafts, hobby supplies and other goods.
Apogee is the exclusive supplier to major chains such asMichaels ( MIK ),Aaron's ( AAN ), Hobby Lobby and Jo-Ann Fabric and Craft Stores.
Although the LSO Technologies segment contributes only about 10% of overall revenue, the business is "very profitable," Puishys said, with operating margins in the upper 20% range.
"And it's less cyclical than the architectural businesses," he said. "It is a good fit for us."
On the architectural side of the business, Apogee eyes more revenue in the retrofit market, Puishys says. This is where older buildings are renovated with new glass systems rather than being torn down altogether.
The company also looks at ways to diversify its architectural segment into broader end markets, Puishys said, "whether it's the finishes we put in the metal or the anti-reflective technology used in the picture-frame industry. We have a lot of potential to take some of our current technology to other spaces."
Finally, Apogee looks to broaden its geographic reach, both in the U.S. and internationally.
In the U.S. -- where about 85% of the firm's revenue comes from -- it has room to grow on the East Coast, Puishys says. Internationally, the company's near-term plan is to grow its market share in South America, where it has an operation in Brazil.
"It's a very diverse and fragmented market with a lot of growth potential," Puishys said.
Financially, Apogee is in the midst of its strongest run in years, with four straight quarters of 42%-or-better EPS growth and 18%-or-better revenue growth. Analysts polled by Thomson Reuters expect the company to post a 59% year-over-year gain in Q4 earnings and a 13% rise in revenue.
"Robust bidding and quoting levels are expected to result in sequential improvement in backlog in Q4," analyst Thielman noted. "This would mark the fifth consecutive quarter of sequential backlog growth."
Apogee has an IBD Composite Rating of 98. It is part of IBD's Building-Construction Products/Miscellaneous group, which ranks No. 18 out of 197 industries that IBD tracks. Other leaders in the group areCaesarstone ( CSTE ) -- a countertop maker featured in The New America on Feb. 9 -- andHeadwaters (HW).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
