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Shares of Primoris (NASDAQ:PRIM) have seen tough times so far this year. In the summer I was concluding that the company was building the business, being well positioned as a service play to various kinds of infrastructure.
The company has seen solid growth, something which has been achieved on both an organic and inorganic basis. While valuations did not look too demanding, I had some questions and concerns on the back of lower margins, volatile results, and questions behind a recent deal.
A Recap
Primoris is a trusted service provider for those who built out America´s infrastructure, providing services like specialty contracting, engineering, maintenance, and procurement. Secular tailwinds and years of underinvestments, as well as transformation to sustainable energy and broadband, are driving the business.
The company generates some $3.5 billion in revenues, generated from utilities, energy, and renewable companies, as well as pipeline services. The more than 10,000 workers are responsible for this revenue base, with a backlog of $4 billion being greater than the annual revenue contribution.
With gross margins coming in around 10% of sales, this is typically a lower margin business. In relation to the operating cost base, the company posts high margins as operating margins came in around 5% in 2021, with Primoris having posted $170 million in operating earnings on $3.5 billion in sales. This indicates that outside of the cost of goods sold, the company posts margins of around 50% on the remaining expense base.
The company posted net earnings of $115 million in 2021, with earnings reported at $2.17 per share on the back of a 53 million share count. The company posted adjusted earnings of $2.70 per share, with the difference to GAAP earnings largely due to stock-based compensation expenses. Net debt of $461 million was manageable as EBITDA approached the $300 million mark.
The 2022 guidance, issued at the start of the year, is a bit underwhelming with adjusted earnings per share down to $2.49 per share, with GAAP earnings seen at $2.20 per share. Given a $1.7 billion enterprise valuation, the company traded around 0.5 times sales and equity was trading around 10 times earnings, marking very modest valuations.
In June, Primoris announced a substantial deal, announcing its intention to acquire PLH Group in a $470 million deal as the transaction was set to increase net debt to nearly a billion. The utility constructor adds $733 million in sales, for a pro forma number around $4.2 billion. The deal is set to add $54 million in EBITDA, a number which could increase by another $10 million after accounting for synergies, pushing up pro forma leverage ratios to around 3 times.
With the business having steadily grown over time, and shares having traded in a $20-$30 range in recent years, valuations have come down over time, increasing appeal with the passage of time. Such a situation is always interesting and looks compelling given the long-term secular growth. It was the somewhat softer operational performance on the back of these tailwinds and positioning which left me a bit cautious, resulting me to hold a neutral stance.
Coming Down
Since shares traded around the $25 mark in June, they have fallen to the high-teens in September, now trading at $21 per share as general markets recovered a bit in recent weeks.
The company closed the PLH deal on the first day of August and announced second quarter results a week later, keeping the midpoint of the adjusted earnings per share guidance unchanged at $2.49 per share. The softer first half of the year suggests that earnings are expected to recover in the second half of the year. There was good news as the company announced multiple contract awards including a $270 million solar project, a $120 million pipeline project, and $400 million worth of deals in the energy/renewable segment.
In November, the company announced third quarter results which revealed a 40% increase in third quarter sales to $1.28 billion, including a $155 million contribution of PLH. This resulted in year-over-year improvements in earnings with adjusted earnings per share up twenty-three cents to $1.12 per share.
A decent profit number is welcomed as EBITDA continues to trend around $300 million, with net debt coming in at $1.1 billion. This was quite a bit higher than the pro forma net debt number of nearly a billion at the time of the PLH deal, due to some minor share buybacks and working capital requirements to fund growth of the business.
What Now?
The truth is that 2022 has been a mixed year, with the first quarter results being utterly soft, in part offset by a very strong third quarter, increased backlog and perhaps room for earnings to improve next year. That is about the good news as inflation is a tricky item as this is a low margin business, with net debt coming in higher than anticipated.
Despite the small leverage concerns, I am impressed with the third quarter results as valuations have been de-risked a bit given the dismal share price performance, making me gradually become upbeat on the risk-reward here, although some leverage constraint would be nice.
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