AAON Inc. (NASDAQ:AAON) experienced a notable decline in its stock price on Monday, closing down 5.9% at $89.24. The drop came even as the company reported record-breaking quarterly sales, a divergence that highlights investor concerns about profitability amidst rapid expansion.
The Tulsa-based HVAC manufacturer saw its shares initially surge 7.6% in premarket trading, reaching a high of $97.47 before reversing course. The stock eventually settled at $89.24, with a session low of $85.72. Trading volume was exceptionally heavy, with 2.57 million shares changing hands, approximately 2.4 times the average daily volume.
Strong Revenue Growth, But Margin Pressures Emerge
For the second quarter, AAON reported net sales of $627.0 million, more than doubling from $311.6 million in the same period last year, a 101.2% increase. This figure significantly surpassed the consensus estimate of $503.0 million by 24.7%. The company's adjusted diluted EPS of $0.69 also beat expectations, coming in 39.7% above the forecast of $0.49.
However, the market's focus shifted to the company's revised guidance, which painted a more cautious picture for margins. Management raised its full-year sales growth projection to 55%-60%, up from the previous 40%-45% range, but simultaneously lowered its gross margin forecast to 25%-26% from 27%-28%.
This margin pressure stems from the significant investments being made to expand capacity, particularly in the data-center cooling segment. The company's gross margin contracted to 24.3% in the quarter, down 230 basis points from 26.6% in the prior year. Gross profit increased by 84.3% to $152.5 million, but this growth lagged behind the sales increase by 16.9 percentage points.
Data-Center Segment Drives Growth, But Costs Rise
The BASX brand, which serves the data-center market, saw sales surge 216.2% to $345.0 million. Meanwhile, AAON-branded sales grew 39.3% to $282.2 million. This shift underscores the company's strategic focus on the rapidly growing data-center cooling market, but it also brings higher production costs due to new capacity, outsourced components, and inflationary pressures.
CEO Matt Tobolski acknowledged the challenges, stating, "We are clear-eyed about the margin work ahead." He emphasized the company's commitment to sequential margin improvement in the second half of the year, driven by better utilization, pricing, and sourcing actions.
Backlog Remains Strong, Offering Visibility
Despite the margin concerns, AAON's backlog continues to provide substantial revenue visibility. The backlog reached $1.97 billion, a 98.0% increase year-over-year, representing approximately 3.1 quarters of sales at the current run rate. While overall backlog declined 7.4% from March due to faster production, the AAON-branded backlog grew 6.0% sequentially.
Stock Valuation and Analyst Sentiment
Following the decline, AAON's stock is trading at 62.8 times trailing earnings, reflecting its high-growth status. The shares remain 40.6% below their 52-week high of $150.18. Analyst recommendations are predominantly bullish, with five out of six rating the stock a "Buy" and one a "Hold." The average price target among those published is $142.25, implying a potential upside of 59.4% from Monday's close.
However, several risks could impact the stock's trajectory, including potential delays in data-center projects, extended periods of low utilization due to rapid capacity expansion, and ongoing cost pressures from inflation and outsourcing.
As the company navigates these challenges, investors will be closely watching its ability to convert its robust sales growth into sustainable profitability. The next few quarters will be critical in determining whether AAON can achieve the margin improvements it has promised.
