Simpson Manufacturing Can Scale New Highs In 2023

Key Points

• Simpson Manufacturing Co. has had a solid quarter, and shares are rising. 
• The analysts were spurred to action and began raising targets for the stock. 
• The chart shows a strong bullish candle pattern; Three White Soldiers. 

As tepid as the building market is, Simpson Manufacturing Co., Inc.'s NYSE: SSD results prove it can scale new highs in 2023. The company is executing its long-term strategy to grow sales and improve profitability which led management to raise its guidance for the year.

The increase in guidance catalyzed action from the analyst community, which has the market on the move. Based on the outlook, the stock could climb another 15% or more which is consistent with the technical signal. 

The analysts have been silent regarding Simpson Manufacturing for many quarters but not anymore. The Q2 results sparked 2 updates immediately after the release making the first in over a year. The updates include 2 price target revisions with a consensus of $182.50, or about 16% above the current action.

The 2 have a combined rating of Moderate Buy, which is down YOY but may improve given the outlook. 

Institutional activity is another factor that could help lift SSD stock to new highs this year. The institutions own almost 90% of the stock and have been buying on balance all year.

Buying outpaces selling by 1.4:1, with a noticeable spike in buying during Q2 2023. That spike is consistent with a bullish technical pattern and rally that put the stock at an all-time high ahead of the Q2 release. Now the market is moving even higher. 

Simpson Has Solid Quarter: Shares Rally 

Simpson had a solid quarter, with demand in North America offsetting weaker European conditions. Revenue was reported as $597.58 million, up 0.7%, and beat the Marketbeat.com consensus by 800 basis points. The gain was driven by a 2% increase in North America, attributed to volume gains offset by a 4.12% decline in the EU, also blamed on volume.

The company reported incremental gains in the Wood and Concrete Construction categories and margin improvement in all segments. 

The company’s gross margin improved by 440 basis points compared to last year to drive outperformance through to the bottom line. Income from operations improved by 9.0%, and GAAP earnings increased by 15.7%. Working capital changes and share repurchases impact GAAP earnings, beating the consensus by 2200 basis points. 

Simpson does not give formal guidance but was able to update its outlook for operating margin. The company increased the guidance for operating margin by 100 basis points at the low end and 50 at the top. The company also increased its guidance for CAPEX as it lends to new growth opportunities.

The new CEO Mike Olosky referenced a greenfield opportunity, a new and untapped revenue source and catalyst for the share price. 

Simpson Is Building A Safe Dividend History 

Simpson Manufacturing is not a high-yield name, but the 0.7% payout is compounded by capital growth and share repurchases. However, the dividend is among the safest mid-cap payouts and only 14% of earnings. The company paused annual increases during the pandemic, not the distribution, and has only increased the payout since 2013. Distribution increases were resumed; the increase is due in July 2024. 

The chart is good. The stock is in a solid uptrend, showing Three White Soldiers on the weekly chart. Three White Soldiers is a bullish chart pattern that shows a strong market with the bulls in charge.

This pattern may result in a consolidation or small pullback, but upward momentum should continue, and new highs should be set. The next significant catalyst will likely come when the company reports Q3 results.

The analysts are expecting YOY growth to accelerate but for revenue to fall significantly on a sequential basis. With the summer building season in full swing and the home builders outpacing consensus, that doesn’t seem likely.