Quanex (NX)

Building products company Quanex (NYSE:NX) beat Wall Street’s revenue expectations in Q4 CY2024, with sales up 67.3% year on year to $400 million. The company expects the full year’s revenue to be around $1.85 billion, close to analysts’ estimates. Its non-GAAP profit of $0.19 per share was significantly above analysts’ consensus estimates.

Company Overview

Starting in the seamless tube industry, Quanex (NYSE:NX) manufactures building products like window, door, kitchen, and bath cabinet components.

Traditionally, home construction materials companies have built economic moats with expertise in specialized areas, brand recognition, and strong relationships with contractors. More recently, advances to address labor availability and job site productivity have spurred innovation that is driving incremental demand. However, these companies are at the whim of residential construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates. Additionally, the costs of raw materials can be driven by a myriad of worldwide factors and greatly influence the profitability of home construction materials companies.

Competitors of Quanex include JELD-WEN (NYSE:JELD) and private companies Pella and Anderson.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Luckily, Quanex’s sales grew at a solid 10% compounded annual growth rate over the last five years. Its growth beat 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. Quanex’s annualized revenue growth of 8.8% over the last two years is below its five-year trend, but we still think the results were respectable.

We can better understand the company’s revenue dynamics by analyzing its most important segments, Fenestration and Cabinet Components, which are 33.6% and 11% of revenue. Over the last two years, Quanex’s Fenestration revenue (window and door components, North America only) averaged 4.2% year-on-year declines while its Cabinet Components revenue (cabinet parts, North America only) averaged 12.9% declines.

This quarter, Quanex reported magnificent year-on-year revenue growth of 67.3%, and its $400 million of revenue beat Wall Street’s estimates by 4.6%.

Looking ahead, sell-side analysts expect revenue to grow 28.9% 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 catalyze better top-line performance.

Quanex 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 23.2% gross margin over the last five years. Said differently, Quanex had to pay a chunky $76.76 to its suppliers for every $100 in revenue.

In Q4, Quanex produced a 23.1% gross profit margin, up 1.6 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.

Quanex was profitable over the last five years but held back by its large cost base. Its average operating margin of 7% 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, Quanex’s operating margin decreased by 4.6 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. . Quanex’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, Quanex generated an operating profit margin of negative 1.7%, down 5.1 percentage points year on year. Conversely, its revenue and gross margin actually rose, so we can assume it was recently less efficient because its operating expenses like marketing, R&D, and administrative overhead grew faster than its revenue.

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.

Quanex’s EPS grew at a spectacular 15.6% compounded annual growth rate over the last five years, higher than its 10% annualized revenue growth. However, we take this 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 shorter period to see if we are missing a change in the business.

Quanex’s two-year annual EPS declines of 6.9% were bad and lower than its 8.8% two-year revenue growth.

In Q4, Quanex reported EPS at $0.19, up from $0.18 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Quanex’s full-year EPS of $2.19 to grow 17.4%.

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.

Quanex 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 6%, subpar for an industrials business.

Taking a step back, we can see that Quanex’s margin dropped by 6.7 percentage points during that time. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business.

Quanex burned through $24.13 million of cash in Q4, equivalent to a negative 6% margin. The company’s cash burn was similar to its $5.73 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

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).

Although Quanex hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked. Its five-year average ROIC was 12.4%, higher than most industrials businesses.

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. Over the last few years, Quanex’s ROIC averaged 3 percentage point decreases each year. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Quanex reported $49.98 million of cash and $879.9 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 $201.6 million of EBITDA over the last 12 months, we view Quanex’s 4.1× net-debt-to-EBITDA ratio as safe. We also see its $4.12 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 Quanex blew past analysts’ EPS and EBITDA expectations this quarter. We were also excited its revenue and full-year EBITDA guidance outperformed Wall Street’s estimates. Zooming out, we think this was a solid quarter. The stock traded up 3% to $21.05 immediately following the results.

Updated: May 19, 2025 at 10:04 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Quanex.

Quanex isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was solid over the last five years and is expected to accelerate over the next 12 months, its cash profitability fell over the last five years. And while the company’s projected EPS for the next year implies the company’s fundamentals will improve, the downside is its declining operating margin shows the business has become less efficient.

Quanex’s P/E ratio based on the next 12 months is 7.2x. While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $34.75 on the company (compared to the current share price of $18.52).

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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