Simpson Manufacturing Company Is Building Strong Cash Flow Simpson Manufacturing Company (NYSE: SSD) just announced a great second-quarter report but one that reveals an underlying problem within the economy.

Simpson Manufacturing Company Delivers On Growth

Simpson Manufacturing Company (NYSE: SSD) just announced a great second-quarter report but one that reveals an underlying problem within the economy. The company's revenue is up strongly over the past year and the past two years but more because of pricing increases than because of business increases. The company described the volume growth as marginal and went on to mention two pricing increases worth as much as 20% for some products enacted earlier this year. The good news for Simpson is that business is at least steady and margins are growing, the bad news for Simpson and the economy is that underlying inflation is here to stay and there are still no signs of its subsiding any time soon.

Simpson Manufacturing Beats And Raises

Simpson Manufacturing reported $410.28 in net consolidated revenue for a gain of 25.8% over last year. This beat the consensus by 360 basis points and this is a very significant comp. The company's revenue grew high single-digits in the previous year and is up 34% over the past two years on the combination of internal efforts and economic conditions. On a segment basis, North American sales grew by 22.2% while sales in Europe grew by 51%. Sales in Europe as well as those in Canada we aided by foreign exchange, sales in Europe experienced a 930 basis point tailwind from the foreign exchange that will likely persist through the end of the calendar year.

The good news, the really good news, is that gross margin and operating margin are both widening. This shows that, at least for now, the company's pricing efforts are outpacing inflationary gains and should continue to drive solid earnings through the end of the year. The gross margin improved by 200 basis points to 47.9% while the operating margin increase by 270 basis points to 24.8% to drive strong earnings and cash flow. The company's income from operations grew by 40% and the cash flow nearly doubled which is excellent news for a dividend grower of this caliber. On the bottom line, the GAAP EPS of $1.66 beat the consensus by a nickel.

Simpson does not give official guidance for revenue or earnings but it did update the guidance for margin, tax rate, and capital spending. The company narrowed the range for operating margin by 50 basis points to 19.5% to 21% and maintained the expected tax rate at 25% to 26%. The detail we find interesting is that capital expenditures were increased by $5 million to $55 million to $60 million dollars which we read as an expectation for above-consensus revenue in the back half of the year.

Simpson Manufacturing Has A Dividend You Can Build On

Simpson Manufacturing doesn't pay a high-yielding dividend but it does pay one of the safest on the market and one that comes with a very high likelihood for future increases. At face value, the company is paying out less than 20% of its earnings with both earnings and margins on the rise so there is plenty of room to increase the dividend. The balance sheet is also a fortress so there's nothing to worry about in regards to debt or other obligations to keep investors up at night. If anything, investors should worry about how large the next dividend increase will be and it could be relatively large. Based on the balance sheet, the payout history, and the results, we think the next increase could be high single-digit to low double-digits at least.

The Technical Outlook: Simpson Manufacturing Is Ready To Move Higher

Shares of Simpson Manufacturing pulled back over the last couple of months but appear to have put in a bottom and look ready to move higher. The second-quarter results have premarket action edging higher and that is supported by the indicators. The MACD is still only mildly bullish but the bias is definitely upward, the stochastic is still a little iffy as well but shows underlying support within the market. Assuming that price action continues upward a move above $112 would be very significant and could take price action up to the range of $116 to $120 very quickly.

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