SGS (SIX:SGSN) stock rose over 4% on Tuesday following a strong earnings report that surpassed estimates. The company’s adjusted earnings per share for fiscal year 2024 came in about 2% above consensus expectations.
The key drivers behind the earnings beat included a 30-basis point outperformance in the adjusted operating income (AOI) margin and a free cash flow performance that exceeded forecasts by about 11%.
The company’s outlook for fiscal year 2025 remains in line with current consensus expectations, with growth in organic revenue and reported AOI margins expected to stay on track.
The guidance also reaffirmed SGS's long-term opportunities discussed in the company's Capital Markets Day (CMD) presentation in late 2024.
While the headline figures were solid, the reported operating income was largely in line with expectations after adjusting for restructuring charges.
In fact, these restructuring expenses accounted for approximately half of the AOI beat, raising questions about the sustainability of these gains.
The Health and Nutrition (H&N) division was the primary contributor to the AOI outperformance, accounting for 85% of the total beat. This suggests that the margin improvements were not as broad-based across the business as they might have appeared on the surface.
Additionally, net debt, including leases, came in about 6% higher than consensus expectations, despite the stronger-than-expected FCF.
This indicates some challenges on the balance sheet that investors may want to monitor in the near term. On the positive side, SGS’s organic growth for FY24 was a solid 7.5%, with the fourth quarter contributing 6.5% to the total.
The company’s performance in Latin America and Eastern Europe, the Middle East, and Africa stood out, with mid- to high-teen growth in these regions, although foreign exchange headwinds partly offset the gains.
RBC Capital Markets analysts said that while the 2025 outlook meets consensus, projected AOI margins are about 10 basis points below expectations.
However, this guidance is likely conservative. The company also reaffirmed its strategy of pursuing small acquisitions to drive an additional 1-2% growth through M&A.
