On June 7, 2012, the GeoTeam published an article on Goldfield (GV) titled, "Goldfield: A 'Four-Bagger' In The Making." At the time of our original report, the stock was trading at $1.60. Within our article, we made mention of a GV Director, Jeffrey Eberwein, who had purchased 115,000 shares of the company's stock in the open market. He has since added another 235,000 shares. On March 25, 2013, less than nine months after our initial write-up, the stock traded at a 52-week high of $5.67, providing investors who acted on our article with a 254% return.
Please reference the following quote from our report:
"GV has an advantage of being a micro-cap stock liquid enough for institutions to pile into."
The flip side of any stock with liquidity is that it provides an attractive target for short sellers and negative articles. Investors who follow our work know that we have no problem writing detailed, short-biased articles when the facts warrant them. Some investors even reference our team as being "notorious short sellers." Given our experience in this particular area, we anticipated that it would only be a matter of time before GV would incite an article with a short thesis. This scenario came to fruition after the market closed on March 26, 2013 when a first-time author's article was published on Seeking Alpha titled, "Goldfield Corp, Unsustainable Margins And Declining Backlog." It is our belief that this article motivated an emotional response from investors through insinuation and a lack of explanation concerning the real dynamics of GV's transformational growth story. Unfortunately, this short-biased article was "short" on facts. Investors can subscribe to the author's "what-if" scenarios or look at the tangible results GV has produced.
Those who are short this story are playing with fire and could be blindsided by favorable financial comparisons throughout 2013 as well as by backlog or contract news from this fundamentally strong company. In fact, GV's core backlog (non-CREZ and omitting real estate operations) was $12.2 million as of December 31, 2011, but shot up to $25 million by February 27, 2012, showing how quickly GV can add to its contract pipeline. Don't forget that the 2013 first quarter numbers are just around the corner. We believe that GV will begin to tell its story to the market which should address some of the issues discussed in the March 26, 2012 article. Investors should also be aware that Quanta Services, Inc. (PWR), a multi-billion dollar conglomerate acquired 4 companies in 2011 within the electrical construction industry.
Contrary to the bearish article's catastrophic inferences, we will prove that:
- GV is growing its core revenues (64% in 2012)
- Is opportunistic in the work it goes after, and
- Experiencing operating leverage.
A Tall Tale
The short article is basically chalking up GV's operational success over the past year to one large contract that it won in 2012 for a Texas project called the Competitive Renewable Energy Zone (CREZ), and specifically, the Bakersfield to Big Hill Line. This development dramatically increased GV's backlog from $12.2 million to $77.8 million. The article also mentions that another company, Irby Corp., beat out GV (and three others) in a bid for an additional CREZ project, the Odessa to Bakersfield Line. Here is a related quote from the author that supports the opinion that GV is just a one-project story:
"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."
We respectfully disagree with the statement that,
"…Goldfield has nothing to backfill the gaping hole in the backlog being left by the completion of Goldfield's CREZ project."
As we will discuss later, with a little analysis, it's easy to see that GV grew its non-CREZ electrical construction revenues 64% to $52.2 million in 2012. More importantly, management's commentary from the 2012 fourth quarter press release published March 26, 2013 clearly indicates that the company will grow with or without the CREZ project.
"We believe we will meet the challenge of generating new business more than sufficient to offset completion of this project (CREZ: Bakersfield to Big Hill Line)."
"The prospects for our electrical construction business are brighter today than at any time in recent history."
It is quite possible that the CREZ project will be remembered as a minor catalyst in the overall story that put GV on the map. The opportunities for GV go well beyond CREZ in an industry that is experiencing dynamic change, and of which we had made reference to more than once throughout our original article:
"...From Alaska to Georgia and Wyoming to Florida, utilities are seeking permission to pass on hundreds of millions of dollars in new charges to customers to help upgrade aging infrastructure and build new or retrofitted power plants that comply with tougher environmental regulations..."
"...The influx of requests, many still pending before state regulators, has left energy experts convinced that electricity prices will be on the rise for the foreseeable future as the industry struggles to modernize its aging infrastructure..."
"...They [utility companies] desperately need to upgrade," says Bill Richardson, the former New Mexico governor and Clinton-era energy secretary who once famously called America a superpower with a Third World power grid. "You're seeing rate hikes everywhere because this is a widespread, national problem..."
"...states have imposed new clean-energy standards that require utilities to feed in renewable sources. Older systems can't handle variable power sources such as wind and solar, and therefore require significant upgrades. Throw in pollution controls now required by federal regulations, and utilities are facing billions in upgrade costs..."
To say that GV, "...has nothing to backfill the gaping hole in the backlog …", would be void of the fact that GV's core operations, where backlog has not been a great barometer of future prospects, have generated steady revenue throughout 2012. In 2012, GV reported:
- Revenue grew to $81.6 million in 2012 from $32.8 million the prior year.
- Net income increased in 2012 to $12 million ($0.47 per share) from $874 thousand ($0.03 per share) in 2011.
The bottom line results are even more impressive when one considers that GV's tax rate was 28% in 2012 vs. 8% in 2011.
2011 core revenues were $31.7 million, which did not include any contribution from the CREZ project. A careful analysis of the revenue contribution of CREZ compared to core revenues reveals that 2012 full-year revenues consisted of:
- $52.2 million from core business.
- $28.2 million from CREZ.
This proves that:
- GV grew its core business to the tune of 64% in 2012.
- Core revenues were more than that from CREZ.
Additional analysis of the facts offers insight that GV can ramp up revenues in the absence of a CREZ-type project, one that puts great demands on the company's operations, quite possibly at the expense of building its core backlog. By referencing the 2012 first quarter, it can be seen that GV reported $17.1 million in core revenues at a time when the CREZ project was not borrowing company resources. Our belief that the company is now in a position to support a higher quarterly revenue run-rate is partially brought on by the 2012 fourth quarter record results, management's bullish commentary and its decision to upgrade equipment in 2012, further enabling it to increase its project workload.
In fact, the 2012 fourth quarter revenue performance of $25 million, combined with the highest margin outing for the year, may indicate that GV could take revenues to new heights without putting a strain on its operations. Such a performance gives us confidence that the company is willing to support increased core business even as other opportunities arise.
2012 may have been a transformational year for GV. As a small company, its involvement in the CREZ project should bolster its reputation throughout its particular industry and open doors for several other projects in Texas, as well as other areas of the U.S. where it is aggressively increasing its penetration. The following management commentary is a testament to this notion:
"We believe that our recent expansion into Texas and our new CREZ project will provide a good opportunity for further growth in this region."
"These results reflect not only markedly increased demand for services by utilities upgrading and expanding their transmission and distribution infrastructure, but also the strengthening of Goldfield's capability in a larger service area."
"Our strategy of moving beyond our historic Florida base -- and expanding our operations in Texas, the Carolinas and Virginia -- has paid handsome dividends."
The Backlog Multiplier - Proof That Any Inferred Challenges to GV's Core Growth Are Exaggerated
The changing dynamics taking place in GV's industry began impacting the company in 2011. Those who feel the need to still focus on backlog as opposed to the industry dynamics putting high margin opportunities on GV's plate should consider that the 2012 year-end core revenues came in at $52.2 million or 4.3 times the 2011 year-end backlog of $12 million. The 2011 multiplier effect was 6.2. It's obvious that GV can obtain contracts well in excess of end-of-quarter backlog numbers.
We can conclude that the odds are strong that GV will grow at a significant multiple of its 2012 year-end backlog, especially now that the needs of the customers in the industry it serves have moved into another gear. In crunching the numbers, another revealing statistic shows that GV's 2012 ending core backlog stood at $17 million, which is a record year-end figure and implies that 2013 revenues, when combined with the remaining CREZ work, should easily reach $100 million, setting a strong foundation for 2014.
Margins: GV Is Benefitting From Picking The Right Projects And By Doing More With Less; The Best Of Both Worlds
Jim Collins discusses the "Eureka" moment in his book, "Good to Great;" a moment great companies reach when the "fly wheel" of success goes into overdrive, propelling them to new operational heights at an accelerated pace. He explains that, "some companies take the leap and others don't." It appears that moment has arrived for GV.
The March 26 article points out that GV's 2012 fourth quarter 31% EBITDA margins are unsustainable when compared to other players, such as Quanta Services, Inc. and Willbros Group (WG) for which EBITDA margins are running in the mid-teens and single digits, respectively. It seems that the author assumes that in this competitive environment, GV's margins are going to collapse to WG's levels within a year. We find this assumption to be imbalanced, as GV's pre-tax margins began 2012 at 15% and ended at 24%, while electrical construction gross margins (excluding depreciation) rose from 25% to 31% over the same period. Pre-tax margins are expanding faster than gross margins due to an SG&A line growing much slower than revenues. Thus, some of the strides in margins that GV is making are coming from running an efficient ship (2012 fourth quarter revenues were 44% higher than 2012 first quarter sales, while SG&A was virtually unchanged).
Improving Margins Are Not Just the Result of CREZ
Even before the CREZ project kicked in, GV's first quarter gross (electrical construction) and pre-tax margins stood at a healthy 25% and 15%, respectively. The mere fact that GV can attain high margins in a competitive industry shows that such a task can be accomplished. We think that the real questions investors need to ask are:
1. What is GV doing right?
2. Would a company like PWR take a hard look at GV?
3. Where will GV revenues be at when and if margin erosion occurs?
While it is fair to argue that at some point in GV's growth curve its margins could moderate, we don't think significant margin erosion is near. Furthermore, GV's core revenue growth could easily compensate for margin erosion, should it happen to occur. The company is in the beginning of a new growth cycle and participating at the right time in a hot industry. Healthy margins are being driven by the efficiency provided by equipment upgrades (simply, the ability to do more with less), choosing the right project work, and its operating leverage (2012 sales increased 153%, while its SG&A increased only 25%).
Focus on High Margin Business: Low Bid Does Not Always Win
With healthier margins than its competitors, GV simply seems to be a product of taking the right approach and being more particular about the business it chases. If Irby Corp. did win the Odessa to Bakersfield Line CREZ project, it would have done so without having been the lowest bidder, case and point that the low-margin bid doesn't always win and that above-average margins are attainable. Continuing to reference the Odessa to Bakersfield Line CREZ project, even though GV lost the contract, its bid was lower than that of a billion dollar publicly traded enterprise, MasTec, Inc. (MTZ).
Smaller Can Be Better
To compare GV to both PWR and WG is an uneven analogy. Both of these companies are multi-billion dollar enterprises that are obviously at different points in their growth curves and expected to grow revenues by less than 10% in both 2013 and 2014. WG just entered the electric construction segment in 2010. Sometimes bigger is just not better, as a smaller company can be more nimble and focus on niches in its market that larger firms may ignore.
We can argue about margins all day long, but investors will have to make their own choices. Either they can side with a management team that is beginning to deliver the goods or, at the risk of being caught in a short-squeeze, subscribe to a "what-if" doomsday scenario that is short of facts.
Short-Biased Doomsday Valuation Scenarios are Wildly Unrealistic
We differ in opinion from the article's conclusion that GV is worth between $0.32 and $2.30 as it fails to even consider the positive catalysts happening within its industry as a whole. The $0.32 target assumes that GV will not find projects to replace CREZ, causing shares to trade at pre-CREZ levels. That estimate can be immediately thrown out; it deduces that the company will totally collapse despite the fact that GV handsomely grew its core operation in 2012 and that management believes that it will more than replace revenues lost from the CREZ project.
It appears that the $2.30 assumption is supported by the author's belief that the margins associated with the revenues generated to replace the CREZ project will be on par with those of WG, in the high single-digits. As we've already noted, GV's 2012 first quarter performance showed that it can achieve above-average margins from non-CREZ work; and this was prior to equipment upgrades. Our internal analysis has also led us to conclude that the high 2012 fourth quarter margins can be partially attributed to non-CREZ work since CREZ is based on fixed-price terms agreed upon at contract inception. Thus, the new business that GV realized in the 2012 fourth quarter was likely at a very high margin.
Contrary to the article's valuation scenarios, we believe that GV shares should trade at a much higher P/E multiple from where it currently stands. Investors should also take note that both WG and PWR, with their lower margin businesses, are trading near 52-week highs and selling at 2013 P/E multiples of around 20, compared to GV's trailing P/E multiple of 8. GV's return on assets (21%) and equity (44%) are hands down superior to both WG and PWR (less than 10% each).
Price targets based on:
- 15 x Trailing EPS of $0.47 = $7.05
- 20 x Trailing EPS of $0.47 = $9.40
- 25 x Trailing EPS of $0.47 = $11.75
We Predict That the Company Will Step Up Its Communication with the Street
We think that the company will heed our advice and become more comfortable telling its story to the market in the coming months. While we did not expect management to make a bold statement regarding its belief that it can "more than" replace the revenues from its current CREZ project once it is complete, the fact that it did is probably the biggest clue that better days may be ahead for GV and its stock price. We urge skeptical investors to:
- Read in-between the lines of management commentary
- Take a close examination of the disruptive trends taking place in the markets that GV serves
- Interview management as we did