Worthington (WOR)

Diversified industrial manufacturing company Worthington (NYSE:WOR) reported Q1 CY2025 results exceeding the market’s revenue expectations, but sales fell by 3.9% year on year to $304.5 million. Its non-GAAP profit of $0.91 per share was 29.5% 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 performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Worthington’s demand was weak and its revenue declined by 19.4% per year. This wasn’t a great result and suggests it’s a low quality business.

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. Worthington’s recent performance shows its demand remained suppressed as its revenue has declined by 49.1% 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.

Worthington also breaks out the revenue for its most important segments, Consumer Products and Building Products, which are 45.9% and 54.1% of revenue. Over the last two years, Worthington’s Consumer Products revenue (cylinders, torches, balloon kits, tools) averaged 11.4% year-on-year declines while its Building Products revenue (refrigerant, cylinders, tanks) averaged 1.7% declines.

This quarter, Worthington’s revenue fell by 3.9% year on year to $304.5 million but beat Wall Street’s estimates by 6.7%.

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

Worthington has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 16.7% gross margin over the last five years. Said differently, Worthington had to pay a chunky $83.32 to its suppliers for every $100 in revenue.

Worthington’s gross profit margin came in at 29.3% this quarter, marking a 6.2 percentage point increase from 23.1% in the same quarter last year. Worthington’s full-year margin has also been trending up over the past 12 months, increasing by 3.2 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).

Worthington was profitable over the last five years but held back by its large cost base. Its average operating margin of 3.7% 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, Worthington’s operating margin decreased by 5.4 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 Q1, Worthington generated an operating profit margin of 6.9%, up 5.5 percentage points year on year. The increase was driven by stronger leverage on its cost of sales (not higher efficiency with its operating expenses), as indicated by its larger rise in gross margin.

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 a decent 9.3% compounded annual growth rate over the last five years, higher than its 19.4% annualized revenue declines. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.

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 10.6%. 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 21% mark a reversal from its five-year trend. We hope Worthington can return to earnings growth in the future.

In Q1, Worthington reported EPS at $0.91, up from $0.80 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 $2.77 to grow 6.9%.

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.

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 7.5% 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 4.4 percentage points during that time. This shows the company is 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.

Worthington’s free cash flow clocked in at $44.43 million in Q1, equivalent to a 14.6% margin. This result was good as its margin was 1.9 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? Enter ROIC, a metric showing how much operating profit a company generates relative 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 1.3%, 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 $222.8 million of cash and $316.2 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 $118.3 million of EBITDA over the last 12 months, we view Worthington’s 0.8× net-debt-to-EBITDA ratio as safe. We also see its $2.14 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 expectations this quarter. We were also excited its revenue and EBITDA outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this quarter featured some important positives. The stock traded up 3.3% to $43 immediately after reporting.

Updated: May 21, 2025 at 11:30 PM EDT

Before deciding whether to buy Worthington or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

We see the value of companies helping their customers, but in the case of Worthington, we’re out. To begin with, 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 19.8x. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $58.80 on the company (compared to the current share price of $58.72).

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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