ESCO (ESE)

Engineered products manufacturer ESCO (NYSE:ESE) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 6.6% year on year to $265.5 million. The company’s full-year revenue guidance of $1.20 billion at the midpoint came in 4.5% above analysts’ estimates. Its non-GAAP profit of $1.35 per share was 8.3% above analysts’ consensus estimates.

Company Overview

A developer of the communication systems used in the Batmobile of “The Dark Knight,” ESCO (NYSE:ESE) is a provider of engineered components for the aerospace, defense, and utility sectors.

Engineered components and systems companies possess technical know-how in sometimes narrow areas such as metal forming or intelligent robotics. Lately, automation and connected equipment collecting analyzable data have been trending, creating new demand. On the other hand, like the broader industrials sector, engineered components and systems companies are 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 Teledyne (NYSE:TDY), Parker-Hannifin (NYSE:PH), and Ametek (NYSE:AME).

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, ESCO’s 7.6% annualized revenue growth over the last five years was decent. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

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. ESCO’s annualized revenue growth of 8.5% over the last two years aligns with its five-year trend, suggesting its demand was stable.

This quarter, ESCO grew its revenue by 6.6% year on year, and its $265.5 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 18.2% over the next 12 months, an improvement versus the last two years. This projection is eye-popping and suggests its newer products and services will fuel better top-line performance.

ESCO’s unit economics are great compared to the broader industrials sector and signal that it enjoys product differentiation through quality or brand. As you can see below, it averaged an excellent 38.9% gross margin over the last five years. Said differently, roughly $38.90 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

ESCO produced a 41.1% gross profit margin in Q1, up 2.3 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, 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 a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

ESCO has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 13.4%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, ESCO’s operating margin rose by 3.1 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, ESCO generated an operating profit margin of 16.1%, up 2.8 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

ESCO’s EPS grew at a solid 10.9% compounded annual growth rate over the last five years, higher than its 7.6% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into ESCO’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, ESCO’s operating margin expanded by 3.1 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 shorter period to see if we are missing a change in the business.

For ESCO, its two-year annual EPS growth of 20.7% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q1, ESCO reported EPS at $1.35, up from $0.94 in the same quarter last year. This print beat analysts’ estimates by 8.3%. Over the next 12 months, Wall Street expects ESCO’s full-year EPS of $5.04 to grow 22.9%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

ESCO has shown robust cash profitability, enabling it to comfortably ride out cyclical downturns while investing in plenty of new offerings and returning capital to investors. The company’s free cash flow margin averaged 9.8% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that ESCO’s margin was unchanged during that time, showing its long-term free cash flow profile is stable.

ESCO’s free cash flow clocked in at $13.96 million in Q1, equivalent to a 5.3% margin. This result was good as its margin was 4.4 percentage points higher than in the same quarter last year, but we note it was lower than its five-year cash profitability. Nevertheless, we wouldn’t read too much into a single quarter because investment needs can be seasonal, leading to short-term swings. Long-term trends trump temporary fluctuations.

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).

Although ESCO has shown solid business quality lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 8.1%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

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. On average, ESCO’s ROIC increased by 2.6 percentage points annually over the last few years. its rising ROIC is a good sign and could suggest its competitive advantage or profitable growth opportunities are expanding.

ESCO reported $57.4 million of cash and $123.9 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 $222 million of EBITDA over the last 12 months, we view ESCO’s 0.3× net-debt-to-EBITDA ratio as safe. We also see its $11.61 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.

It was great to see ESCO raise its full-year EPS guidance and provide full-year revenue guidance that beat Wall Street's estimates. We were also glad its EPS and EBITDA topped expectations. Zooming out, we think this was a good print with some key areas of upside. The stock remained flat at $163.61 immediately after reporting.

Updated: May 21, 2025 at 11:11 PM EDT

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

In our opinion, ESCO is a solid company. First off, its revenue growth was decent over the last five years and is expected to accelerate over the next 12 months. And while its mediocre ROIC lags the market and is a headwind for its stock price, its projected EPS for the next year implies the company’s fundamentals will improve. On top of that, its expanding operating margin shows the business has become more efficient.

ESCO’s P/E ratio based on the next 12 months is 28.7x. This valuation tells us that a lot of optimism is priced in. ESCO is a good one to add to your watchlist - there are better investment opportunities out there at the moment.

Wall Street analysts have a consensus one-year price target of $187.50 on the company (compared to the current share price of $177.95).

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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