Quanex (NX)

Building products company Quanex (NYSE:NX) announced better-than-expected revenue in Q1 CY2025, with sales up 70% year on year to $452.5 million. The company expects the full year’s revenue to be around $1.85 billion, close to analysts’ estimates. Its non-GAAP profit of $0.60 per share was 27% above analysts’ consensus estimates.

Company Overview

Starting in the seamless tube industry, Quanex (NYSE:NX) manufactures building products like window, door, kitchen, and bath cabinet components.

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 of Quanex include JELD-WEN (NYSE:JELD) and private companies Pella and Anderson.

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. Luckily, Quanex’s sales grew at an excellent 13.5% compounded annual growth rate over the last five years. Its growth beat the average industrials company and shows its offerings resonate with customers.

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. Quanex’s annualized revenue growth of 18% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

We can better understand the company’s revenue dynamics by analyzing its most important segments, Fenestration and Cabinet Components, which are 33.4% and 11.3% of revenue. Over the last two years, Quanex’s Fenestration revenue (window and door components, North America only) averaged 3.4% year-on-year declines while its Cabinet Components revenue (cabinet parts, North America only) averaged 9.6% declines.

This quarter, Quanex reported magnificent year-on-year revenue growth of 70%, and its $452.5 million of revenue beat Wall Street’s estimates by 3.2%.

Looking ahead, sell-side analysts expect revenue to grow 15.3% over the next 12 months, a slight deceleration versus the last two years. Despite the slowdown, this projection is commendable and indicates the market is baking in success for its products and services.

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.

Quanex has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 23.8% gross margin over the last five years. Said differently, Quanex had to pay a chunky $76.22 to its suppliers for every $100 in revenue.

Quanex produced a 29% gross profit margin in Q1, up 4.2 percentage points year on year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Quanex was profitable over the last five years but held back by its large cost base. Its average operating margin of 7.3% 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, Quanex’s operating margin decreased by 4.3 percentage points 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. Quanex’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, Quanex generated an operating margin profit margin of 9%, up 1.3 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

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.

Quanex’s EPS grew at a spectacular 15% compounded annual growth rate over the last five years, higher than its 13.5% annualized revenue growth. However, we take this with a grain of salt because its operating margin didn’t expand and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

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.

Quanex’s two-year annual EPS declines of 5.4% were bad and lower than its 18% two-year revenue growth.

In Q1, Quanex reported EPS at $0.60, down from $0.66 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Quanex’s full-year EPS of $2.13 to grow 27.7%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Quanex has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 6%, subpar for an industrials business.

Taking a step back, we can see that Quanex’s margin dropped by 9.9 percentage points during that time. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business.

Quanex’s free cash flow clocked in at $13.58 million in Q1, equivalent to a 3% margin. The company’s cash profitability regressed as it was 6.6 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

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).

Although Quanex hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked. Its five-year average ROIC was 13%, higher than most industrials businesses.

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, Quanex’s ROIC has decreased 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.

Quanex reported $62.63 million of cash and $926.7 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 $223.5 million of EBITDA over the last 12 months, we view Quanex’s 3.9× net-debt-to-EBITDA ratio as safe. We also see its $16.99 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 Quanex blew past analysts’ EPS expectations this quarter. We were also glad its revenue outperformed Wall Street’s estimates.Zooming out, we think this quarter featured some important positives. The stock traded up 4.6% to $17.88 immediately after reporting.

Updated: July 8, 2025 at 11:02 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Quanex.

Quanex isn’t a terrible business, but it isn’t one of our picks. Although its revenue growth was impressive over the last five years and is expected to accelerate over the next 12 months, its diminishing returns show management's prior bets haven't worked out. And while the company’s projected EPS for the next year implies the company’s fundamentals will improve, the downside is its cash profitability fell over the last five years.

Quanex’s P/E ratio based on the next 12 months is 7.4x. While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $33.75 on the company (compared to the current share price of $20.11).

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.