Thus far in 2012 we have highlighted 3 GeoBargains in Seeking Alpha articles: Manitex Intl (MNTX), SMTC Corporation (SMTX), and Titan Intl (TWI). Respectively, the maximum returns of these stocks, ensuing our commentaries and in this very uncertain and volatile period, were 98.1%, 45.7% and 51.9%, resulting in an average return of 65.2%. Please note that we removed MNTX from the GeoBargain list at $10.50 on 5/15/2012.
This brings us to Goldfield (GV). At the stock's current price near $1.60, we believe that it will easily exceed the returns of any of these companies, possibly leading to a "4 bagger", as Peter Lynch might say. Our confidence in this story is strengthened by the fact a director of GV just purchased 115 thousand shares of GV in the open market over the last few days.
Goldfield: A micro-cap stock liquid enough for institutional investors.
- On 04/13/2012, we coded GV as a GeoBargain on the Radar @ $1.15.
- On 5/11/2012, we coded GV as a GeoBargain @ $1.51.
Company Description: Goldfield is a leading provider of electrical construction and maintenance services in the energy infrastructure industry throughout much of the United States. The company specializes in installing and maintaining electrical transmission lines for a wide range of electric utilities.
Data As Of 6/5/2012
- Price = $1.58
- Fully-Taxed Trailing EPS = $0.08
- GeoTeam calculated fully-taxed EPS Estimate= $0.43
- P/E based on Fully-Taxed Trailing EPS = 19.75
- P/E based on Fully-Taxed GeoTeam EPS Estimate= 3.7
Qualitative Reasons for Optimism
1. Renewed focus capitalizes on favorable industry trends. In recent years, Goldfield has increased its efforts to target electric utility companies. Several favorable industry trends make GV a timely growth story.
- More on Less: Local governments are reducing the size of land (through imminent domain) that utility companies can occupy for the construction of utility projects.
- Voltage Requirements: As the demand for more voltage at power locations increases, so to should the demand for improved technology to meet this trend.
- Wind Resistance: Utilities in areas such as Florida, where the company is a large player, are being forced to build stronger utility poles.
- Retrofitting: Upgrading old infrastructure to accommodate new regulatory requirements (such as reducing voltage leakage and implementing other environmentally friendly enhancements).
- Cosmetic: Communities are asking utilities to construct more attractive infrastructure.
- Clean Energy Push: Utility companies are being encouraged to consider the delivery of clean energy solutions.
Here are some excerpts from an article "Electric Bills About to Spike", by Laura Colarusso of the Daily Beast that echoes these favorable trends:
"...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..."
These trends, combined with an improving economy and successful efforts by utilities to pass on costs of upgrades to customers, should create a growing pipeline of projects for Goldfield to bid on. Also exciting about the trends in the electric energy industry is that the push for utilities to offer clean energy initiatives brings an added dimension of "flavor" to the Goldfield story. Another plus is that GV strategically targets geographies where the needs to upgrade infrastructure (Florida) and expedite clean energy solutions (Texas) are in full force.
2. New Near-Term Growth Cycle. Goldfield entered our radar in Late March 2012. Until recently, GV had churned out lackluster earnings and sales growth. In fact, leading up to the 2011 fourth quarter, the last 11 quarters produced a minimal profit only two times. During this period, quarterly revenue ranged from $5 to $9 million.
However, in the 2011 fourth quarter GV reported revenues of $11.4 million and was solidly profitable with EPS of $0.06 ($0.04 fully taxed). Although our due diligence led us to believe that significant growth drivers were in place for GV, we were not quite certain if the 2011 fourth quarter set a new EPS bar for the company or was just a one-time event. On May 11, 2012 GV announced 2012 first quarter earnings that easily exceeded our expectations and increased our confidence in GV's near-term prospects.
- Revenues for the three months ended March 31, 2012 nearly doubled, increasing to $17.7 million from $8.9 million in the comparable prior year period.
- Net income for the three months ended March 31, 2012 was $2.7 million, or $0.10 per share ($0.06 fully taxed), compared to a net loss of $11,000, or ($0.00) net loss per share, in the comparable prior year period.
Quarterly revenue of $17 million is a big deal when considering that the company's annual revenue since 2004 has ranged between $27 million and $36 million. Management comments solidify that the company may be at a growth inflection point:
"...The prospects for our electrical construction business are brighter today than at any time in recent history..."
3. Margin Expansion. Equally telling about GV's new found growth is that its gain in sales has been accompanied by healthy margins. The company's pre-tax margins have not just improved, but have skyrocketed from under 3% to 15.2% and 14.9% for the 2011 fourth quarter and 2012 first quarter, respectively. This shows that Goldfield is not chasing sales just to gain market share and also has significant operating leverage.
4. Burgeoning Backlog. Since December 31, 2011 the company's electrical construction backlog, which stood at $12.2 million (vs. $5.2 million at December 31, 2010), has grown to $70.6 million as of March 31, 2012. Much of this backlog has come from winning a contract award from the Competitive Renewable Energy Zones (CREZ) project in Texas.
"...A CREZ is a geographic area, designated by the Public Utility Commission (PUC) of Texas, where wind generation facilities will be constructed. The project will eventually transmit 18,456 megawatts (MW) of wind power from West Texas and the Panhandle to highly populated metropolitan areas of the state..."
On February 27, 2012, the Company was selected as prime contractor to build a 110 mile long 345kV transmission line, as part of a CREZ project.
Furthermore, the company stated that $55 million of the backlog will be filled in 2012, which alone implies revenue growth of at least 68%. Overall, we believe the company can generate 2012 revenue of at least $100 million up from $32.8 million in 2011. Using first quarter 2011 pre-tax margins of around 15%, the $55 million backlog alone implies an EPS contribution of $0.32 ($0.20 fully taxed) for 2012. Combining this with our conservative pre-backlog EPS assumption run rate of $0.34 ($0.23 fully taxed), which takes into account seasonality, implies that GV could achieve 2012 EPS of $0.66 ($0.43 fully taxed). Applying a P/E of 15 on our 2012 fully taxed EPS assumption yields a near-term valuation scenario of $6.45.
Although investors may assume a good deal of GV's near term growth prospects are attributable to the CREZ project, the company already has a headstart going into 2013, since the project extends through August 2013. Furthermore, as the company becomes entrenched in the CREZ project we presume it will have good opportunities to secure additional contract wins with respect to this type of project as well as other projects in Texas. Additionally, as evidenced by the 2012 first quarter results, GV's existing core business (not including the CREZ project) is growing at an accelerated clip. We expect that this will alone grow revenues by at least 30% in 2012.
5. True Diamond in the Rough: Investors who value GV on trailing EPS or the assumption this is a one contract story (CREZ) could miss a golden opportunity. The company's improving financial results have yet to reflect its backlog which means $55 million in sales is going to be packed into the next three quarters. We are looking forward to the market participants scrambling to absorb this information. GV has an advantage of being a micro-cap stock liquid enough for institutions to pile into. And with only a 1% institutional ownership (according to Yahoo.com) we think such an event is imminent. In fact, the stock traded 1.5 million shares after it announced its stellar 2012 first quarter numbers compared to recent average trading daily volume of under 200,000. How much you want to bet some of this volume was institutional capital?
Institutions may not be the only entities building a position in GV. A GV director, Jeffrey Eberwein, just purchased a total of around 115,000 shares in the open market at current prices on May 31, 2012 and June 1, 2012. What is telling about this purchase is that this director just initiated his first position in GV.
As listed in the caveats at the end of this article, although the company has a small real-estate division that could mistakenly distract investors from GV's primary growth drivers, astute investors will realize that this division contributes less than 5% of revenues to GV and is not a major focus stressed by management.
Investors may be able to profit from the GV story as this could be a classic case of the exploitation of an inefficient market place. After having exhibited several years of stagnant growth, the company is now taking advantage of its opportunity in its served markets. GV is one big contract win away from adding a new layer of confidence to its story. Finding companies with these types of abrupt changes in fortunes is where diamonds in the rough are often born.
Quantitative Criteria Check List
GV Meets 9 out of 10 of our most important requirements for growth and risk-based quantitative data.
Recent 52-week High(generally within 3 months)
Strong EPS Growth Rate
Yes, As of 1st Qtr. 2012
*Over 30% EPS Growth Rate: Yes,
*GeoPowerRanking (GPR) of 4 (Number of consecutive quarters that EPS is expected to grow at least 20 to 30%).
10% Revenue Growth
GeoMinimum Operating Cash Flow and Balance Sheet Requirements
No, as of 1st Qtr. 2012
*Positive Cash Flow - Yes; $395,553
*Long Term Debt to Equity Ratio less than 20% - No; 27%
*Current Ratio is at least 2:1 - No: 1.75:1
*Days in receivables < 90 - Yes; 60 days. This is a measure of liquidity that shows if the company converts its accounts receivable to cash within 90 days, or (receivables/sales)/days in quarter
Return on Equity is at least 15%
37% run rate
Minimum Pre-tax Operating Margins of 8%
15.2% as of 1st Qtr. 2012
Preferably Under 50 Million Shares (Fully Diluted)
25.4 Million shares as of 1st Qtr. 2012
High Insider Ownership (generally greater than 15%)
Limited Institutional Ownership (generally less than 20%)
P/E Divided by Growth Rate (PEG Ratio) is Less Than 1.
GeoTeam overall subjective/confidence comfort level: Pertains to the ability of a company to achieve solid and consistent EPS growth over the next several quarters (from 1 to 10): 7
Potential Valuation Scenarios if the company can achieve its EPS growth goals
- Short-Term Potential value based on fully taxed adjusted trailing EPS:
- P/E 25 $0.08 = $2.00
- Short-term Potential value based on 2012 GeoTeam calculated fully taxed EPS estimate:
- P/E 15 $0.43 = $6.45
Please note that we are placing much more weight to a valuation scenario based on forward EPS due to GV's growing backlog.
Additional factors to consider in analysis
- Effective Internal Controls: Yes
- Needs to raise equity capital: Low
- Majority of revenue in the current backlog is from one contract related to the Competitive Renewable Energy Zone (CREZ) project. If the company is not able to win other contracts from this project, or awards of similar size from different projects, maintaining the current elevated revenue stream may be challenged going into the second half of 2013. (Additional contract wins in Texas could be game a changer for GV).
- We don't have full insight into the CREZ project margins but are optimistic that management will not just chase sales and market share.
- The company has a small real-estate division that could mistakenly distract investors from GV's primary growth drivers. Astute investors will realize that this division contributes less than 5% of revenues to GV and is not a major focus of management.
- The company's projects are fixed price in nature. This means that the company is contracted to complete work within a pre described budget. There is risk to the company if it under estimates the cost of a project.
- Seasonality can influence quarterly revenue distribution:
"...Revenue and results of operations in our electrical construction business can be subject to seasonal variations. These variations are influenced by weather, customer spending patterns and system loads. The Company performs electrical construction services throughout most of the United States, but historically, these services have been performed primarily in the southeast region of the United States. Electric utility customers normally perform their system upgrades and maintenance work during off-peak seasons when the demand for electrical power is reduced, which is in the first two quarters of the year in the southeast region. This pattern is typically reflected by a reduction in the number of our active projects in the third quarter. However, since hurricane season normally peaks during the third quarter, this reduction can be offset with storm restoration work resulting from hurricane damage..."
1Valuation scenarios are not intended to be investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions.
2Our analysis is based on Quantitative and Qualitative factors. Even if a company does not meet the majority of our quantitative requirements, strong qualitative factors can still influence our optimism for a given story. Furthermore, gaining alpha in a market entails finding companies before the masses do, which means that there is value added when one can identify stocks that may currently have weaker quantitative data, but will soon improve. The GeoTeam typically considers EPS Growth, Revenue Growth and PEG Ratio as the most important quantitative attributes that affect short term valuation.
3All EPS numbers, valuation scenarios, P/Es and relevant quantitative data are based on a fully taxed assumption
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