Watershed Quarter for Engineering Firm ENGlobal

ENGlobal Corp. (ENG) appears to have pulled out all the stops to produce record sales and earnings in the second quarter 2006. The Company reported 2Q06 EPS of $0.09 versus $0.06 in the prior year quarter.This was $0.03 better than our estimate. The upside for the quarter was due primarily to better-than-expected billings for its Engineering Services.

ENGlobal continues to benefit from robust capital spending by the oil and gas industry and claims most of the largest players in the sector, such as ExxonMobile (XOM) and Chevron Corporation (CVX), as customers. Revenue of $75.1 million (up 26.6% year-over-year) was $4.6 million better than we expected. Excluding the $2.0 million contribution (our estimate) from the acquisition of WRC in late May 2006, total revenue would have grown 23.3% year-over-year.

ENGlobal was successful in completing negotiations with several customers on contract renewals with more favorable pricing for ENGlobal. We estimate gross profits on Engineering Services increased to 14.4% of sales compared to 13.4% in the previous quarter. Our new sales estimate for 2006 is $294.2 million (from $282.6 million) providing net earnings of $8.7 million or $0.32 per share (from $7.2 million and $0.27 per share.

Our Buy rating and $13.60 price target are reiterated. At our price target, ENG shares would be valued at 42 times and 32 times our 2006 and 2007 EPS estimates, respectively. We believe the quarter can be seen as something of a watershed for ENGlobal. The Street digests fundamental information about ENGlobal at a relatively slow pace given that the Company does not hold an earnings conference call and has a limited investment conference schedule. Nonetheless, continued positive news from the Company should provide the validation the Street needs to reconsider ENG.

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