Primoris Stock: Building The Business (NASDAQ:PRIM)

Primoris Services (NASDAQ:PRIM) is a name which has not seen too much coverage on this platform, yet it provides an important role in building America´s infrastructure. Under the radar, the company has steadily grown operations driven by organic growth and dealmaking, as this created quite an established business, which is looking somewhat attractive here.

An Intro

Primoris aims to be a trusted service provider for those who build America´s infrastructure, providing services like specialty contracting, maintenance, engineering, and procurement. These end markets benefit from quite a few secular tailwinds which include underinvestment into the same infrastructure, a transition to sustainable energy, broadband, and more trends.

In terms of the annual $3.5 billion revenue composition, it is both utilities and energy/renewables which make up for just less than half of total sales, complemented by a high-single-digit share from pipeline services. More than 10,000 workers generate these revenues with the backlog of $4 billion just surpassing the revenue number. Note that these activities are typically low-margin businesses as contract values are ballooning because of purchase orders, with gross margins coming in at a range of around 10% of sales.

While gross margins were not so high around 10% of the revenue base, operating margins are relatively high. A $170 million operating profit was posted in 2021 on revenues of $3.7 billion, translating into margins of around 5%, as these operating margins reveal that outside of purchasing, the company can generate some 50% margins on the remaining cost base.

2021 – The Base Case

On the first day of February, Primoris posted its 2021 results. Full-year sales were flat at $3.50 billion, but the outlook was starting to look a lot better with the backlog being up 44% to $4.0 billion. Utilities made up nearly 50% of sales in 2021, energy/renewables some 40%, as pipeline revenues were decimated and fell to just 10% of sales, albeit that they were the most profitable activities out there.

Operating costs rose in a modest fashion, up by $6 million to $170 million, as net earnings of $115 million translated into flattish earnings of $2.17 per share amidst an increase in the share count to 53 million shares. Adjusted earnings rose to $2.70 per share with the discrepancy between both earnings metrics increasing on the back of amortization charges on goodwill. Net debt of $461 million was still manageable despite those dealmaking efforts in 2021, as EBITDA a few million shy of the three hundred million mark revealed a relatively modest 1.5 times leverage ratio.

Given the long-term outlook and dealmaking, it is the 2022 guidance which is a bit underwhelming, certainly if we factor in the growing backlog. 2022 GAAP earnings are seen at a midpoint of $2.20 per share, with adjusted earnings seen at $2.49 per share, marking declines year-over-year. The 53 million shares outstanding now trade at $24, resulting in an equity value of $1.27 billion, or just over $1.7 billion if we factor in net debt. This is equal to about 0.5 times sales as equity trades at just around 10 times earnings.

In May, first quarter results revealed a 4% decline in first quarter sales to $784 million, despite the secular trends. Amidst inflationary pressures, sales deleveraging, and losses at the pipeline business, the company saw operating profits of $13 million in the first quarter of 2021 fall to just a million here, as the first quarter is traditionally soft. This translates into a GAAP loss of three pennies, with adjusted earnings coming in at a penny.

Net debt increased to $492 million amidst softer cash flow trends in the quarter, important as quarterly adjusted EBITDA was cut more than in half to $22 million and change. Despite arguably softer first quarter results, the company hiked both the GAAP and adjusted earnings guidance by ten cents, which is somewhat surprising, I must say.

A Big Deal

Late in June, Primoris announced a big deal with the $470 million purchase of PLH Group in a $470 million cash deal, a transaction set to nearly increase net debt to the billion mark, or about $960 million if we look at the first quarter financial statement. PLH is a utility-focused specialty constructor, mostly working for power delivery and gas utility end markets. With $733 million in annual sales, the deal is set to boost sales by some 20% to $4.2 billion, as a >0.6 times sales multiple marks a bit of a premium compared to the own valuation, in part explained because a greater portion of Master Service Agreements de-risking the order book somewhat.

With adjusted EBITDA of $54 million, the deal comes at a near 9 times multiple, albeit that some $10 million in synergies are expected as EBITDA margins actually lag compared to Primoris itself, even after accounting for synergies, as this makes me a bit cautious. Leverage will furthermore inch up to more than 3 times, as the state of the balance sheet is now a bit stretched, and some near-term accretion could be seen as a result of the deal.

And Now?

Reality is that with exception to a brief spike to $40 last year, shares mostly traded in a $20-$30 trading range for most of the past decade. Amidst a rather flattish share count, the company has gradually been increasing earnings, as valuation has come down a bit. This valuation compression happened at a time when the market was seeing valuation multiple expansion, which is interesting, yet the result of a service provider with thin margins is, of course, not the most predictable.

The latest deal for PLH does not strike me as particularly interesting, mostly given the own low valuation, yet with power and infrastructure benefiting from the long-term secular trends, Primoris might just deserve a bit more attention here, certainly given the valuation attached to the business.