Record Backlog And Hog Technologies Acquisition Will Assure Future Success

Key Takeaways

• Strategic acquisitions and market share expansion, especially in the dump truck segment, are expected to drive revenue growth and enhance earnings.
  
• Investments in capacity and new product initiatives aim to boost operating leverage, profit margins, and customer penetration, supporting sustained organic growth.
  
• Increased tax expenses, potential trade policy changes, and reliance on strategic initiatives pose risks to Federal Signal's margins and profitability despite revenue growth.

Catalysts

Designs, manufactures, and supplies a suite of products and integrated solutions for municipal, governmental, industrial, and commercial customers in the United States, Canada, Europe, and internationally.

• Federal Signal recorded a new all-time high in backlog at the end of Q1, providing excellent visibility and stable revenue expectations for the remainder of the year and into the first half of 2026. This positions the company well for sustained revenue growth.
  
• The company is focused on strategic market share expansion efforts, particularly within its dump truck body business, which saw over 75% of revenue growth from new customers. Continued market share expansion efforts are likely to drive revenue growth and improve net earnings.
  
• Recent acquisitions are contributing positively to Federal Signal's top-line results; the acquisition of Hog Technologies is expected to add between $50 million and $55 million in net sales for 2025. This inorganic growth is expected to boost the company's revenue and earnings.
  
• Federal Signal's investments in capacity expansion from 2019 to 2022 have enabled them to absorb incremental production volumes, which is expected to enhance operating leverage and maintain or increase profit margins in the future.
  
• The company's strategic initiatives in new product development and aftermarket offerings are aimed at growing above market rates and improving customer penetration, supporting organic growth that benefits net margins and overall earnings.

Federal Signal Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Federal Signal's revenue will grow by 8.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.1% today to 12.7% in 3 years time.
• Analysts expect earnings to reach $309.6 million (and earnings per share of $4.95) by about May 2028, up from $211.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.8x on those 2028 earnings, down from 25.1x today. This future PE is greater than the current PE for the US Machinery industry at 21.6x.
• Analysts expect the number of shares outstanding to decline by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.29%, as per the Simply Wall St company report.

Federal Signal Future Earnings Per Share Growth

Risks

• The company might face challenges in maintaining its net margins due to increased tax expenses, as the tax expense for the quarter was $15.7 million compared to a benefit of $700,000 in Q1 last year. This substantial increase could affect its future net earnings growth.
  
• Although the company's shift towards domestic sourcing is beneficial in mitigating tariff impacts, any changes in global trade policies or tariffs could still indirectly affect input costs, potentially impacting gross margins.
  
• The decrease in GAAP diluted EPS from $0.84 per share to $0.75 per share compared to last year indicates potential issues in sustaining profitability despite strong revenue growth.
  
• While production capacity and supply chains have improved, any disruptions or misalignments in production schedules could affect the company's ability to meet demand, directly impacting revenue generation.
  
• Federal Signal's reliance on strategic initiatives for market share expansion might expose it to execution risks, especially if these initiatives don't deliver the expected growth in organic sales, impacting both revenue and earnings projections.

Valuation

• The analysts have a consensus price target of $103.5 for Federal Signal based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $115.0, and the most bearish reporting a price target of just $84.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.4 billion, earnings will come to $309.6 million, and it would be trading on a PE ratio of 24.8x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $87.32, the analyst price target of $103.5 is 15.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.