By Chelsea Wallis
May 19, 2011 – Medill News Service, Chicago
With government budget cuts, Federal Signal is looking at a tough road ahead (Chelsea Wallis/MNS)
Chicago residents could see more grime on the streets this summer than usual. City workers might have to make do with the old sewer pump trucks and the fire department may have to postpone upgrades for emergency vehicles. Municipalities are broke.
That is having an unintended negative effect on Federal Signal Corp., a 110-year-old Chicago-area company that began in the early 20th century making incandescent lamps.
Today, it is an international supplier of public safety products and services. Its products appeal to governments and large companies that perform public maintenance, including vehicles for streets and sanitation, emergency vehicles and public warning alarms. In 2010, Federal Signal bought into a promising market of highway-tolling and parking technologies.
But Federal Signal’s difficulties go beyond its broad product line.
“It’s not a market-share problem, it’s a revenues problem hitting the industry,†said Steve Barger, an analyst with KeyBanc Captial Markets Inc.
On his first day in office, Mayor Rahm Emanuel promised to cut Chicago’s budget by $75 billion, including $1.5 billion in cuts for city vehicles. Wisconsin and Ohio pushed and pulled over high-profile budget debates, while Washington almost stopped in February. Government funding could still flat-line if something isn’t done to raise the debt ceiling by August.
Moreover, “the company is suffering from changing strategies,†Barger said.
Although Barger is the lone analyst who recommends buying the stock, he sees a raft of internal problems: Federal Signal has had a revolving door for CEOs, four of them in the last five years. The company has put too much effort into small sections of its business. Most recently, the company focus on acquiring the technology that scans license plates for road tolls took attention away from the rest of the business. That division makes up a small portion of the company revenue, and in 2010 posted an operating loss of $80.8 million.
On the other hand, analysts are optimistic about new CEO Dennis Martin who took over in October. As a long-time member of the board, Martin is expected to pick up quickly, said Barger, and it is hoped he will bring stability to the company that it’s been missing for the last five years.
In fact, in light of Martin’s arrival, three other analysts say hold the stock, and only one rates it a sell.
Company shares peaked around $25 during the information technology boom of the 1990s, America’s biggest economic expansion to date. But the stock drooped in 2002 and has not yet recovered. By the end of 2008, it dropped again, and has hovered below $10 ever since.
Shares are now trading around $6.35. Their 52-week high was $7.79 and they hit a low of $4.91 in late August.
In the first quarter, Federal Signal posted a loss of 8 cents per share after a loss of $3.05 for the full 2010 fiscal year. Yahoo Finance lists a modest $7.67 average target price for the stock in the next 12 months.
Company revenues and earnings have not found the traction to trend back to better numbers. Back in 2007, Federal Signal’s net income was $54.7 million, compared with $175.7 million in 2010. Net sales have been less dramatic, but still headed in the wrong direction, from $854.8 million in 2007 to $726.5 million in 2010.
Yet Barger and the analysts saying “hold” see potential for this niche player to make a comeback.
“Order trends are OK and improving,†Barger said. “They are up 5.6 percent in the first quarter of 2011 and up 12 percent on the previous quarter.†Some reasons: longer lead time orders, growing industrial business, and international sales.
Federal Signal has occupied its niche markets for long time. Competitors include Spartan Motors Inc., Tata Motors Ltd. and Coach Industries Group Inc., but none of these has the product variety of Federal Signal.