For all of the hubbub about the Keystone XL pipeline, the fact remains that there is a growth spurt underway in the U.S. energy infrastructure. New pipelines are getting built, plants and refineries are getting retrofits, terminals are undergoing expansion, and so on. That's good news for a company like Primoris Services (PRIM) - a relatively unknown engineering company in good shape to leverage further energy infrastructure investments.
Closing The Year On A High Note
Primoris did well relative to sell-side expectations in the fourth quarter. Revenue rose 12% as reported, as strong results from the Western underground segment (pipelines, mostly) offset some slowdowns in projects along the Gulf Coast.
Gross margin expanded by more than a half-point, while reported operating income rose 11%. That wouldn't be so bad in its own right, but that result included a one-time $5 million expense. Adjust that out, and operating income growth came in at 33% and operating margin expanded by more than a point.
Better Things To Come?
On an organic basis, Primoris saw its backlog grow 30% this year, with approximately half of that hitting the income statement in the next year. Sequential growth was more modest at 6%.
Like its more specialized comparable Team (TISI), Primoris should have no particular shortage of business in the next few years. A federal pipeline safety bill is going to require more thorough inspection and maintenance for existing pipelines, and offers a doubling of prior fines as incentive to comply.
One of Primoris's largest and oldest customers, Pacific Gas & Electric (PCG) has already talked about spending $2.2 billion on pipeline safety over the next three years, and Primoris has traditionally handled more than half of PG&E's outsourced pipeline work.
While Mistras Group (MG) and Team may have more to gain on the leak detection side, that's not the whole of the story. About 9,000 miles of pipeline are under construction right now, and another 19,000 miles are on the books as companies look to transport oil and gas from new fields like the Bakken and Marcellus to customers. That's good news for a host of contractors, including Quanta Services (PWR), Wilbros (WG), and Primoris, particularly as Primoris has prior relationships with companies like Williams (WMB), El Paso (EP), and Sempra (SRE) and is a respected player in the field.
Primoris is also looking to build its renewables business. This business has been slow to come on (as has commercial-scale renewable energy in the U.S. in general), but recent contracts in biomass may be the start of the turn. With its experience in complex piping, Primoris should be in good shape to win bids on solar-thermal projects, as well as newbuilds or retrofits for gas-fired power plants.
The Bottom Line
Investors are not exactly hard up for options when it comes to participating in the energy infrastructure build-out. Large contractors like CB&I (CBI) are winning bids for terminals and production/storage platforms, while components companies like Chart Industries (GTLS) are seeing plenty of demand as well.
Primoris should be looking at several years of above-trend growth, though investors would do well to remember that these contracts almost always depend on a relatively supportive financing environment. Primoris is also exposed to cost inflation, as more than two-thirds of contracts are fixed-price. That's great when a company can carefully control costs, but it's a risk factor nevertheless.
The nature of Primoris's business that means that free cash flow jumps around from year to year. Taking a longer-term average (informed by comparables like Team, Quanta, CB&I, and others) and projecting a mid-single digit free cash flow conversion rate suggests that Primoris should be trading in the high teens today, while sustained improvement would drive the target into the $20s. That puts Primoris stock very close to a point where the margin of safety suggests buying the shares.