CSW (CSWI)

Industrial products company CSW (NASDAQ:CSWI) fell short of the market’s revenue expectations in Q1 CY2025, but sales rose 9.3% year on year to $230.5 million. Its non-GAAP profit of $2.24 per share was 1.1% above analysts’ consensus estimates.

Company Overview

With over two centuries of combined operations manufacturing and supplying, CSW (NASDAQ:CSWI) offers special chemicals, coatings, sealants, and lubricants for various industries.

Many HVAC and water systems companies sell essential, non-discretionary infrastructure for buildings. Since the useful lives of these water heaters and vents are fairly standard, these companies have a portion of predictable replacement revenue. In the last decade, trends in energy efficiency and clean water are driving innovation that is leading to incremental demand. On the other hand, new installations for these companies are at the whim of residential and commercial construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates.

Competitors offering similar products include 3M (NYSE:MMM), Sherwin-Williams (NYSE:SHW), and PPG (NYSE:PPG).

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, CSW’s sales grew at an incredible 17.9% compounded annual growth rate over the last five years. Its growth surpassed the average industrials company and shows its offerings resonate with customers, a great starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. CSW’s annualized revenue growth of 7.7% over the last two years is below its five-year trend, but we still think the results were respectable.

This quarter, CSW’s revenue grew by 9.3% year on year to $230.5 million, missing Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 12.6% over the next 12 months, an improvement versus the last two years. This projection is admirable and implies its newer products and services will spur better top-line performance.

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

CSW has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 43.2% gross margin over the last five years. That means CSW only paid its suppliers $56.75 for every $100 in revenue.

CSW produced a 44.2% gross profit margin in Q1, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

CSW has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 18.7%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, CSW’s operating margin rose by 3.9 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, CSW generated an operating profit margin of 19.5%, down 2.5 percentage points year on year. Since CSW’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

CSW’s EPS grew at an astounding 24.5% compounded annual growth rate over the last five years, higher than its 17.9% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into CSW’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, CSW’s operating margin declined this quarter but expanded by 3.9 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For CSW, its two-year annual EPS growth of 17.6% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.

In Q1, CSW reported EPS at $2.24, up from $2.04 in the same quarter last year. This print beat analysts’ estimates by 1.1%. Over the next 12 months, Wall Street expects CSW’s full-year EPS of $8.57 to grow 11%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

CSW has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 14.9% over the last five years.

Taking a step back, we can see that CSW’s margin expanded by 3.6 percentage points during that time. This is encouraging because it gives the company more optionality.

CSW’s free cash flow clocked in at $22.76 million in Q1, equivalent to a 9.9% margin. This result was good as its margin was 1.6 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

CSW’s five-year average ROIC was 14.9%, beating other industrials companies by a wide margin. This illustrates its management team’s ability to invest in attractive growth opportunities and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. CSW’s ROIC has increased over the last few years. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

CSW is a profitable, well-capitalized company with $225.8 million of cash and no debt. This position is 4.3% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

Revenue missed slightly, but EPS beat slightly. Overall, we'd call this quarter fairly online, neither great nor terrible. The stock remained flat at $312.45 immediately following the results.

Updated: May 22, 2025 at 6:52 AM EDT

Before deciding whether to buy CSW or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

CSW is one of the best industrials companies out there. For starters, its revenue growth was exceptional over the last five years. On top of that, its impressive operating margins show it has a highly efficient business model, and its astounding EPS growth over the last five years shows its profits are trickling down to shareholders.

CSW’s P/E ratio based on the next 12 months is 33.1x. Scanning the industrials landscape today, CSW’s fundamentals clearly illustrate that it’s an elite business, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $338 on the company (compared to the current share price of $312.45), implying they see 8.2% upside in buying CSW in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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