L.B. Foster (FSTR)

Railway infrastructure company L.B. Foster (NASDAQ:FSTR) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 21.3% year on year to $97.79 million. On the other hand, the company’s full-year revenue guidance of $560 million at the midpoint came in 3% above analysts’ estimates. Its GAAP loss of $0.20 per share was significantly below analysts’ consensus estimates.

Company Overview

Founded with a $2,500 loan, L.B. Foster (NASDAQ:FSTR) is a provider of products and services for the transportation and energy infrastructure sectors, including rail products, construction materials, and coating solutions.

Automation that increases efficiency and connected equipment that collects analyzable data have been trending, creating new demand for general industrial machinery companies. Those who innovate and create digitized solutions can spur sales and speed up replacement cycles, but all general industrial machinery companies are still at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.

Competitors offering similar products include Trinity Industries (NYSE:TRN), Quanta Services (NYSE:PWR), and Aegion (NASDAQ:AEGN).

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. L.B. Foster struggled to consistently generate demand over the last five years as its sales dropped at a 2.3% annual rate. This was below our standards and is a sign of poor business quality.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. L.B. Foster’s revenue over the last two years was flat, sugggesting its demand was weak but stabilized after its initial drop in sales.

This quarter, L.B. Foster missed Wall Street’s estimates and reported a rather uninspiring 21.3% year-on-year revenue decline, generating $97.79 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 7.9% over the next 12 months, an improvement versus the last two years. This projection is above average for the sector and suggests its newer products and services will catalyze better top-line performance.

L.B. Foster has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 19.6% gross margin over the last five years. Said differently, L.B. Foster had to pay a chunky $80.44 to its suppliers for every $100 in revenue.

L.B. Foster produced a 20.6% gross profit margin in Q1, in line with the same quarter last year. On a wider time horizon, L.B. Foster’s full-year margin has been trending up over the past 12 months, increasing by 1.3 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and input costs (such as raw materials).

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.

L.B. Foster was profitable over the last five years but held back by its large cost base. Its average operating margin of 2% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

Looking at the trend in its profitability, L.B. Foster’s operating margin might fluctuated slightly but has generally stayed the same over the last five years, meaning it will take a fundamental shift in the business model to change.

In Q1, L.B. Foster generated an operating profit margin of negative 2%, down 3.7 percentage points year on year. Since L.B. Foster’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.

L.B. Foster’s EPS grew at a weak 3.5% compounded annual growth rate over the last five years. This performance was better than its 2.3% annualized revenue declines, but we take it with a grain of salt because its operating margin didn’t expand and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

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 L.B. Foster, its two-year annual EPS growth of 66.4% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.

In Q1, L.B. Foster reported EPS at negative $0.20, down from $0.40 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects L.B. Foster’s full-year EPS of $3.31 to shrink by 42.1%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

L.B. Foster has shown poor cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.6%, lousy for an industrials business.

Taking a step back, an encouraging sign is that L.B. Foster’s margin expanded by 4.5 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability was flat.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

L.B. Foster historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.7%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.

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. Fortunately, L.B. Foster’s has increased over the last few years. This is a good sign, and we hope the company can continue improving.

L.B. Foster reported $2.61 million of cash and $102.6 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $29.46 million of EBITDA over the last 12 months, we view L.B. Foster’s 3.4× net-debt-to-EBITDA ratio as safe. We also see its $2.72 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by L.B. Foster’s full-year revenue and EBITDA guidance, which exceeded analysts’ expectations. On the other hand, its revenue, EPS, and EBITDA missed significantly. Overall, this was a softer quarter. The stock traded down 1.1% to $20.20 immediately after reporting.

Updated: May 22, 2025 at 11:26 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own L.B. Foster, you should also grasp the company’s longer-term business quality and valuation.

We see the value of companies helping their customers, but in the case of L.B. Foster, we’re out. For starters, its revenue has declined over the last five years. And while its rising returns show management's prior bets are at least better than before, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its projected EPS for the next year is lacking.

L.B. Foster’s EV-to-EBITDA ratio based on the next 12 months is 4.4x. While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $29 on the company (compared to the current share price of $18.65).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

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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