Worthington (WOR)

Diversified industrial manufacturing company Worthington (NYSE:WOR) announced better-than-expected revenue in Q2 CY2025, but sales were flat year on year at $317.9 million. Its non-GAAP profit of $1.06 per share was 25.6% above analysts’ consensus estimates.

Company Overview

Founded by a steel salesman, Worthington (NYSE:WOR) specializes in steel processing, pressure cylinders, and engineered cabs for commercial markets.

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 in the metals manufacturing industry include Nucor Corporation (NYSE:NUE), Steel Dynamics (NASDAQ:STLD), and Reliance Steel & Aluminum (NYSE:RS).

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Worthington’s demand was weak over the last five years as its sales fell at a 17.7% annual rate. This wasn’t a great result and suggests it’s a low quality business.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Worthington’s recent performance shows its demand remained suppressed as its revenue has declined by 40.9% annually over the last two years. Worthington isn’t alone in its struggles as the Engineered Components and Systems industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

We can better understand the company’s revenue dynamics by analyzing its most important segments, Consumer Products and Building Products, which are 39.5% and 60.5% of revenue. Over the last two years, Worthington’s Consumer Products revenue (cylinders, torches, balloon kits, tools) averaged 8.9% year-on-year declines. On the other hand, its Building Products revenue (refrigerant, cylinders, tanks) averaged 1.3% growth.

This quarter, Worthington’s $317.9 million of revenue was flat year on year but beat Wall Street’s estimates by 5.6%.

Looking ahead, sell-side analysts expect revenue to grow 2% over the next 12 months. Although this projection implies its newer products and services will catalyze better top-line performance, it is still below average for the sector.

Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Worthington has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 17.1% gross margin over the last five years. That means Worthington paid its suppliers a lot of money ($82.95 for every $100 in revenue) to run its business.

Worthington produced a 29.3% gross profit margin in Q2, marking a 4.5 percentage point increase from 24.8% in the same quarter last year. Worthington’s full-year margin has also been trending up over the past 12 months, increasing by 4.8 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.

Worthington was profitable over the last five years but held back by its large cost base. Its average operating margin of 3.5% 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, Worthington’s operating margin decreased by 6.2 percentage points over the last five years. Worthington’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.

In Q2, Worthington generated an operating margin profit margin of negative 9.6%, up 8 percentage points year on year. The increase was solid, 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.

Worthington’s EPS grew at an unimpressive 4.1% compounded annual growth rate over the last five years. This performance was better than its 17.7% annualized revenue declines but doesn’t tell us much about its business quality because its operating margin didn’t improve.

We can take a deeper look into Worthington’s earnings to better understand the drivers of its performance. A five-year view shows that Worthington has repurchased its stock, shrinking its share count by 9.4%. 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 more recent period because it can provide insight into an emerging theme or development for the business.

For Worthington, its two-year annual EPS declines of 27.4% show it’s continued to underperform. These results were bad no matter how you slice the data.

In Q2, Worthington reported EPS at $1.06, up from $0.74 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 Worthington’s full-year EPS of $3.07 to grow 8.2%.

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.

Worthington has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.6% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that Worthington’s margin expanded by 7.7 percentage points during that time. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Worthington’s free cash flow clocked in at $49.33 million in Q2, equivalent to a 15.5% margin. This result was good as its margin was 4.9 percentage points higher than in the same quarter last year, building on its favorable historical 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).

Worthington historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1.2%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.

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, Worthington’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Worthington reported $250.1 million of cash and $326.1 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 $149.6 million of EBITDA over the last 12 months, we view Worthington’s 0.5× net-debt-to-EBITDA ratio as safe. We also see its $2.21 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 Worthington blew past analysts’ EPS and EBITDA expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates. Zooming out, we think this was a solid print. The stock traded up 6.3% to $63.95 immediately after reporting.

Updated: July 15, 2025 at 11:35 PM EDT

Are you wondering whether to buy Worthington or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

We cheer for all companies making their customers lives easier, but in the case of Worthington, we’ll be cheering from the sidelines. To kick things off, its revenue has declined over the last five years. And while its rising cash profitability gives it more optionality, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Worthington’s P/E ratio based on the next 12 months is 18.9x. While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $69 on the company (compared to the current share price of $62.80).