Goldfield (NYSEMKT:GV) is a Florida-based real estate developer and utility transmission and distribution (UT&D) contractor. Goldfield was profiled in a June 2012 write-up which discussed the company's prospects in light of a contract win earlier in the year. Like the previous write-up, this write-up will ignore the real estate segment as background noise.
This contract win was for what is known in Texas as a Competitive Renewable Energy Zone (CREZ) project. The purpose of CREZ projects is to get the large wind farms throughout west and northwest Texas connected to the grid so that the large cities in the rest of the state could accept the power of these previously stranded wind assets. The project is without equal in the rest of the country for its size, originally $5BN worth of projects. The massive size of the projects and number of projects available created an opportunity for Texas UT&D companies to operate at full utilization and as a result allowed for smaller providers to bid on projects for which they otherwise would not have been considered.
Goldfield won a project called "Bakersfield to Big Hill Line." According to the original press release, the project was to be completed by 7/31/13; however, the state website indicates the expected completion date is now 8/31/13 which may result in revenue recognition for the project being drawn out slightly more towards 3Q13 than originally expected.
Bull Case (Fantasy Land)
For the 4th quarter of 2012, GV reported $25.7MM of revenue vs. $11.4MM in 4Q11, a growth rate of 125%. Longs in the stock will take this figure and accompanying EBITDA, annualized by 4 and then slap an industry average multiple on those figures. Doing this quick and dirty analysis ignores 2 important issues for the company going forward.
The bull case presented above ignores the reality that as of this article's writing, Goldfield has nothing to backfill the gaping hole in the backlog being left by the completion of Goldfield's CREZ project. According to the FY12 10K, the total backlog at 12/31/12 was $40.9MM down from $53.6MM at 9/30/12. This backlog is likely to continue to decline. The rumor mill put out a note on 3/1/13 which may be the reason for the huge volume in recent days. This note indicated that Goldfield may have won an additional CREZ project, the Odessa to Bakersfield Line. Our research has confirmed that the winner of that project is Irby not Goldfield. While we are confident in Irby's having won this contract, Goldfield not putting out a press release announcing a win is further evidence as prior large contracts have been announced in press releases (1, 2, 3, 4).
Goldfield's segment EBITDA margin for the electrical construction segment was 31% for 4Q12. This EBITDA margin is completely unsustainable. Quanta (NYSE:PWR) is the industry leader in this business and has EBITDA margins in the mid-teens (13.7% for FY12 p. 122 - less than half of Goldfields. Willbros (NYSE:WG) is seeing EBITDA margins in single digits (6.7%) (EBIT margins of only 1% for FY12 p. 86) and hopes to see EBITDA margins improve to high single digits in late 2013 or 2014. How is it that Goldfield is attaining double the industry leader's margins? As competitive as the construction industry is, 31% EBITDA margins are completely unsustainable and likely to fall back to peer levels in the mid to high single digits.
With more than double the industry leader's margins, Goldfield's margins are bound to come back down as the company encounters competitive forces in the industry which will cut EBITDA by roughly half assuming the company can find a similarly sized replacement project for the current CREZ project rolling off in 3Q13. Worse case, the company is unable to find a similarly sized project and is left levered up, having taken on debt to buy the equipment required to service the existing contract.
In the best case scenario: assuming peer leading margins (more than 50% less than today's) and a replacement contract for the current CREZ contract, GV shares are worth 50% of today's price or about $2.30 per share.
In the worst case scenario: a return to operations as they were prior to February 2012 (date of current CREZ contract award), GV shares should return to where they were at that time. The 5 day average close prior to the announcement of the contract was $0.32 per share.
Disclosure: I am short GV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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