Federal Signal (FSS)

Safety and security company Federal Signal (NYSE:FSS) announced better-than-expected revenue in Q1 CY2025, with sales up 9.2% year on year to $463.8 million. The company’s full-year revenue guidance of $2.06 billion at the midpoint came in 0.5% above analysts’ estimates. Its non-GAAP profit of $0.76 per share was 3.9% above analysts’ consensus estimates.

Company Overview

Developing sirens that warned of air raid attacks or fallout during the Cold War, Federal Signal (NYSE:FSS) provides safety and emergency equipment for government agencies, municipalities, and industrial companies.

Heavy transportation equipment companies are investing in automated vehicles that increase efficiencies and connected machinery that collects actionable data. Some are also developing electric vehicles and mobility solutions to address customers’ concerns about carbon emissions, creating new sales opportunities. Additionally, they are increasingly offering automated equipment that increases efficiencies and connected machinery that collects actionable data. On the other hand, heavy transportation equipment companies are at the whim of economic cycles. Interest rates, for example, can greatly impact the construction and transport volumes that drive demand for these companies’ offerings.

Competitors of Federal Signal Corporation include Oshkosh (NYSE:OSK), Dover NYSE:DOV), and 3M ((NYSE:MMM).

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 many enduring ones grow for years. Luckily, Federal Signal’s sales grew at a solid 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. Federal Signal’s annualized revenue growth of 12.9% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

We can better understand the company’s revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Federal Signal’s backlog reached $1.10 billion in the latest quarter and averaged 10.8% year-on-year growth over the last two years. Because this number is lower than its revenue growth, we can see the company fulfilled orders at a faster rate than it added new orders to the backlog. This implies Federal Signal was operating efficiently but raises questions about the health of its sales pipeline.

This quarter, Federal Signal reported year-on-year revenue growth of 9.2%, and its $463.8 million of revenue exceeded Wall Street’s estimates by 1%.

Looking ahead, sell-side analysts expect revenue to grow 9% over the next 12 months, a deceleration versus the last two years. Despite the slowdown, this projection is commendable and implies the market sees success for its products and services.

Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.

Federal Signal has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 26.1% gross margin over the last five years. That means Federal Signal paid its suppliers a lot of money ($73.92 for every $100 in revenue) to run its business.

Federal Signal produced a 28.2% gross profit margin in Q1, in line with the same quarter last year. On a wider time horizon, Federal Signal’s full-year margin has been trending up over the past 12 months, increasing by 2.1 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Federal Signal 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 12.8%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Federal Signal’s operating margin rose by 4.1 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, Federal Signal generated an operating profit margin of 14.2%, up 1.4 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.

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.

Federal Signal’s EPS grew at a remarkable 12.9% compounded annual growth rate over the last five years, higher than its 9% 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 Federal Signal’s earnings to better understand the drivers of its performance. As we mentioned earlier, Federal Signal’s operating margin expanded by 4.1 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 Federal Signal, its two-year annual EPS growth of 29% 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, Federal Signal reported EPS at $0.76, up from $0.64 in the same quarter last year. This print beat analysts’ estimates by 3.9%. Over the next 12 months, Wall Street expects Federal Signal’s full-year EPS of $3.46 to grow 10.9%.

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.

Federal Signal has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.7% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that Federal Signal’s margin dropped by 1.3 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Federal Signal’s free cash flow clocked in at $31.1 million in Q1, equivalent to a 6.7% margin. This result was good as its margin was 1.3 percentage points higher than in the same quarter last year. We hope the company can build on this 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).

Federal Signal’s five-year average ROIC was 13.8%, higher than most industrials businesses. This illustrates its management team’s ability to invest in profitable growth opportunities and generate value 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. Fortunately, Federal Signal’s ROIC averaged 3.6 percentage point increases 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.

Federal Signal reported $57.5 million of cash and $280.7 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 $365.1 million of EBITDA over the last 12 months, we view Federal Signal’s 0.6× net-debt-to-EBITDA ratio as safe. We also see its $12.3 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 Federal Signal beat analysts’ backlog, revenue, EPS, and EBITDA expectations this quarter. We were also glad it slightly raised its full-year EPS guidance. Overall, we think this was a solid quarter with some key areas of upside. The stock remained flat at $76 immediately following the results.

Updated: May 22, 2025 at 10:58 PM EDT

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

There is a lot to like about Federal Signal. First, the company’s revenue growth was solid over the last five years, and analysts believe it can continue growing at these levels. On top of that, its expanding operating margin shows the business has become more efficient, and its remarkable EPS growth over the last five years shows its profits are trickling down to shareholders.

Federal Signal’s P/E ratio based on the next 12 months is 24.2x. Looking across the spectrum of industrials companies today, Federal Signal’s fundamentals shine bright. We like the stock at this price.

Wall Street analysts have a consensus one-year price target of $104.43 on the company (compared to the current share price of $93.10), implying they see 12.2% upside in buying Federal Signal 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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