Luxfer (LXFR)

Speciality material and gas containment company Luxfer (NYSE:LXFR) missed Wall Street’s revenue expectations in Q4 CY2025, with sales falling 12.3% year on year to $90.7 million. Its non-GAAP profit of $0.24 per share was in line with analysts’ consensus estimates.

Company Overview

With its magnesium alloys used in the construction of the famous Spirit of St. Louis aircraft, Luxfer (NYSE:LXFR) offers specialized materials, components, and gas containment devices to various industries.

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 Worthington (NYSE:WOR), Constellium (NYSE:CSTM), and Dynamic Materials (NASDAQ:BOOM).

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Luxfer’s sales grew at a sluggish 3.4% compounded annual growth rate over the last five years. This was below our standard for the industrials sector and is a poor baseline 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. Luxfer’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 2.6% annually.

This quarter, Luxfer missed Wall Street’s estimates and reported a rather uninspiring 12.3% year-on-year revenue decline, generating $90.7 million of revenue.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. While this projection suggests its newer products and services will catalyze better top-line performance, it is still below average for the sector.

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.

Luxfer’s unit economics are better than the typical industrials business, signaling its products are somewhat differentiated through quality or brand.As you can see below, it averaged a decent 31.1% gross margin over the last five years. That means for every $100 in revenue, roughly $31.09 was left to spend on selling, marketing, R&D, and general administrative overhead.

Luxfer produced a 24.4% gross profit margin in Q4, up 2.2 percentage points year on year. Luxfer’s full-year margin has also 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 one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Luxfer has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 8.2%, higher than the broader industrials sector.

Analyzing the trend in its profitability, Luxfer’s operating margin decreased by 4.2 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Luxfer generated an operating margin profit margin of 3.6%, down 5.5 percentage points year on year. Conversely, its gross margin actually rose, so we can assume its recent inefficiencies were driven by increased operating expenses like 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.

Luxfer’s weak 1.6% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

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.

Luxfer’s two-year annual EPS growth of 33.5% was fantastic and topped its two-year revenue performance.

Diving into the nuances of Luxfer’s earnings can give us a better understanding of its performance. While we mentioned earlier that Luxfer’s operating margin declined this quarter, a two-year view shows its margin has expanded. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q4, Luxfer reported adjusted EPS of $0.24, down from $0.28 in the same quarter last year. This print was close to analysts’ estimates. Over the next 12 months, Wall Street expects Luxfer’s full-year EPS of $1.07 to grow 9.3%.

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.

Luxfer has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.8%, subpar for an industrials business.

Taking a step back, an encouraging sign is that Luxfer’s margin expanded by 2.3 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 fell.

Luxfer’s free cash flow clocked in at $12.4 million in Q4, equivalent to a 13.7% margin. The company’s cash profitability regressed as it was 8.1 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t read too much into this quarter’s decline 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).

Luxfer historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 9%, 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, Luxfer’s ROIC increased by 1.6 percentage points annually each year over the last few years. This is a good sign, and we hope the company can continue improving.

Luxfer reported $10.7 million of cash and $39.4 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 $51.9 million of EBITDA over the last 12 months, we view Luxfer’s 0.6× net-debt-to-EBITDA ratio as safe. We also see its $3.1 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 how significantly Luxfer blew past analysts’ EBITDA expectations this quarter. On the other hand, its revenue missed. Looking ahead, full-year EBITDA guidance missed, but full-year EPS guidance was in line. Overall, this was a mixed quarter. The stock remained flat at $15.55 immediately after reporting.

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Luxfer falls short of our quality standards. First off, its revenue growth was weak over the last five years, and analysts expect its demand to deteriorate over the next 12 months. While its rising cash profitability gives it more optionality, the downside is its weak EPS growth over the last five years shows it’s failed to produce meaningful profits for shareholders. On top of that, its declining operating margin shows the business has become less efficient.

Luxfer’s P/E ratio based on the next 12 months is 13.3x. While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $17 on the company (compared to the current share price of $15.55).