Simpson (SSD)

Building products manufacturer Simpson (NYSE:SSD) announced better-than-expected revenue in Q1 CY2025, with sales up 1.6% year on year to $538.9 million. Its GAAP profit of $1.85 per share was 18.1% above analysts’ consensus estimates.

Company Overview

Aiming to build safer and stronger buildings, Simpson (NYSE:SSD) designs and manufactures structural connectors, anchors, and other construction products.

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 offering connectors in the building products space include Builders FirstSource (NYSE:BLDR), UFP (NASDAQ:UFPI), and private company USP Structural Connectors.

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Thankfully, Simpson’s 14.1% annualized revenue growth over the last five years was exceptional. Its growth beat the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Simpson’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 1.9% over the last two years was well below its five-year trend. We also note many other Home Construction Materials businesses have faced declining sales because of cyclical headwinds. While Simpson grew slower than we’d like, it did do better than its peers.

This quarter, Simpson reported modest year-on-year revenue growth of 1.6% but beat Wall Street’s estimates by 2%.

Looking ahead, sell-side analysts expect revenue to grow 4.2% over the next 12 months. Although this projection suggests its newer products and services will fuel better top-line performance, it is still below the sector average.

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.

Simpson has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 46.4% gross margin over the last five years. Said differently, roughly $46.37 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

Simpson produced a 46.8% gross profit margin in Q1, in line with the same quarter last 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.

Simpson has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 21.5%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Simpson’s operating margin might fluctuated slightly but has generally stayed the same 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.

In Q1, Simpson generated an operating profit margin of 19%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

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.

Simpson’s EPS grew at an astounding 18.3% compounded annual growth rate over the last five years, higher than its 14.1% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.

Diving into the nuances of Simpson’s earnings can give us a better understanding of its performance. A five-year view shows that Simpson has repurchased its stock, shrinking its share count by 5.1%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Simpson, EPS didn’t budge over the last two years, a regression from its five-year trend. We hope it can revert to earnings growth in the coming years.

In Q1, Simpson reported EPS at $1.85, up from $1.77 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 Simpson’s full-year EPS of $7.68 to grow 8.7%.

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.

Simpson 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 12.2% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Simpson’s margin dropped by 6.1 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

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 Simpson hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 24.3%, splendid for an industrials business.

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. Unfortunately, Simpson’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Simpson reported $150.3 million of cash and $462.7 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 $524.7 million of EBITDA over the last 12 months, we view Simpson’s 0.6× net-debt-to-EBITDA ratio as safe. We also see its $7.56 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 enjoyed seeing Simpson beat analysts’ revenue, EPS, and EBITDA expectations this quarter. Zooming out, we think this was a solid quarter. The stock remained flat at $155 immediately following the results.

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

Before making an investment decision, investors should account for Simpson’s business fundamentals and valuation in addition to what happened in the latest quarter.

Simpson isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was exceptional over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out. And while the company’s admirable gross margins indicate the mission-critical nature of its offerings, the downside is its cash profitability fell over the last five years.

Simpson’s P/E ratio based on the next 12 months is 18.8x. Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $185.67 on the company (compared to the current share price of $155.49).

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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