Buying into any sort of company in the energy space or related to it can be really attractive because of the necessity of energy and how that picture will change as the global economy expands. At the same time, getting into this space can be fraught with risks. This is especially true when you have a company that is currently in transition from more traditional fossil fuel activities to those that focus on renewable energies and on providing environmentally friendly technologies. Those companies that can navigate this kind of transition might go on to generate attractive value for their investors. But those that don't can be at significant risk of failure. One business undergoing this kind of transition that nearly failed but is finally showing signs of recovery is Babcock & Wilcox Enterprises (NYSE:BW). Though financial performance for the enterprise is far from great today, it is showing significant improvement over where it was just a couple of years earlier. Add on to this a growth in backlog, and I can understand why some investors would be drawn to the firm.
The management team at Babcock & Wilcox Enterprises describes the company as a globally-focused renewable, environmental, and thermal technologies provider. The firm has been around for over 150 years now, making it one of the oldest publicly traded companies in existence. To better understand the company, however, we should dig into the specific operations that make it up. For starters, let's begin with its first segment, which management aptly calls Babcock & Wilcox Renewable. Through this segment, the company provides customers with technologies aimed at facilitating efficient and environmentally sustainable power and heat generation. Activities here send her around clean technologies like waste-to-energy plants, solar construction and installation, biomass energy and black liquor systems for the pulp and paper industry, and more. During the company's 2021 fiscal year, this segment was responsible for 21.7% of the firm's revenue and for 27.6% of its profits.
Next, we have Babcock & Wilcox Environmental. This segment offers a significant portfolio of emissions control and environmental technology solutions aimed at the utility, waste to energy, biomass, carbon black, and industrial steam generation markets. Specific products include systems that help with cooling, ash handling, particulate control, nitrogen oxides and sulfur oxides removal, chemical looping, and mercury control. This unit was responsible for 18.4% of the company's revenue and for 14% of its profits in 2021. And finally, we have Babcock & Wilcox Thermal. This is, by far, the largest and most profitable segment for the company. In 2021, it accounted for 59.9% of the company's revenue and for 58.4% of its profits. Through this segment, the company sells steam generation equipment, aftermarket parts, construction, maintenance, and field services for plants and power generation, oil and gas, and in the industrial sectors.
Over the past several years, the financial picture for the enterprise has been anything but great. Back in 2012, for instance, the business generated over $2 billion in sales. However, sales were declining for a while and profits were elusive. But what we have seen is a resurgence recently in the business. In 2019, for instance, sales came in at $859.1 million. Revenue then dropped to $566.3 million in 2020 before rebounding to $723.4 million last year. To be perfectly transparent, some of this rebound was related to the ending of the pandemic. However, the backlog numbers for the company tell an interesting story. In 2019, backlog was $441 million. This increased to $535 million in 2020 before jumping to $639 million last year. For the first quarter of 2022, sales came in at $204 million. That compares to the $168.2 million in revenue generated one year earlier. By the end of that latest quarter, backlog had grown to an impressive $721 million. That's up 34.8% compared to the $535 million reported just one year earlier.
On the bottom line, the improvement has been even more impressive. In 2019, the company generated a net loss of $122.7 million. The loss narrowed significantly to just $12.1 million in 2020 before turning to a profit of $21.8 million last year. Operating cash flow has been a bit more volatile. However, if we adjust for changes in working capital, it would have improved consistently, climbing from negative $27.1 million in 2019 to $32.1 million last year. Over the same window of time, EBITDA grew from $46 million to $70.6 million. As for the current fiscal year, we continue to see some improvements. Net loss in the latest quarter was $12 million. That compares favorably to the $15.5 million the company lost in the first quarter of 2021. Operating cash flow improved, going from a negative $54 million to a negative $42 million. Though if we adjust for changes in working capital, it would have gone from a positive $1.1 million to a negative $1.7 million. Meanwhile, EBITDA went from $8.6 million to $12 million.
Improvements the company has made are significant and have already shown positive results. Cost-cutting has been instrumental for the business, but it has also clearly engaged in a number of interesting transactions. One recent transaction was in February of this year when the business acquired a 100% ownership interest in Optimus Industries in exchange for $19 million. That company designs and produces waste heat recovery products for use in the power generation, petrochemical, and process industries. In February of this year, the company acquired Fossil Power Systems, a designer of hydrogen, natural gas, and renewable pulp and paper combustion equipment like igniters, plant controls, safety systems, and more. That deal cost the business $59.1 million. In November of last year, it purchased VODA A/S in exchange for $32.9 million. That entity, based in Denmark, provides aftermarket parts and services to energy-producing incineration plants. And in September of last year, the company purchased a 60% controlling ownership interest in a solar energy contractor called Fosler Construction Company in exchange for $27.2 million, plus contingent consideration of up to another $10 million.
One thing you will notice about these transactions is that they largely center on renewable and environmental activities. This is great news in and of itself, but investors should remember that Babcock & Wilcox Enterprises is still very much exposed to older fossil fuels. In 2021, for instance, the business attributed 47% of its revenue to activities associated with coal-fired power plants. This was actually up from the 45% seen just two years earlier. While it is excellent to see the business become healthier from a fundamental perspective and it is great to see it expanded into more appealing energy markets, that level of exposure is still quite high.
As for pricing the company, the process is fairly simple. However, it does require one special note. In my calculation of operating cash flow, I strip out the preferred distributions the company has to pay. Taking this approach, the business is trading at a price to adjusted operating cash flow multiple of 31. Meanwhile, the EV to EBITDA multiple is considerably lower at 14.3. This disparity is driven by a couple of different factors, the largest being the aforementioned preferred distribution issue and the fact that preferred stock accounts for about $191.73 million of the company’s $1.01 billion enterprise value. To put the pricing of the company into perspective, I did compare it to four similar firms. On a price to operating cash flow basis, these companies ranged from a low of 12.1 to a high of 22.7. Our prospect was the most expensive of the group. Meanwhile, using the EV to EBITDA approach, the range for these four companies was from 4.9 to 67.3. In this case, two of the four companies were cheaper than Babcock & Wilcox Enterprises.
|Company||Price / Operating Cash Flow||EV / EBITDA|
|Babcock & Wilcox Enterprises||31.0||14.3|
|TPI Composites (TPIC)||20.0||20.4|
|AZZ Inc. (AZZ)||12.8||4.9|
|Vestas Wind Systems A/S (OTCPK:VWDRY)||22.7||67.3|
At this moment in time, I must say that I am impressed with how well Babcock & Wilcox Enterprises has recovered. It is still very much in the early stages of a turnaround and a lot could go wrong. But at the same time, a lot of positive things do look to be happening with the company. Having said that, I am still concerned about the company's exposure to coal-fired plants and the fact that the capital structure of the company is rather complex and shares are not exactly cheap. But given the trajectory we are seeing right now and assuming that we don't see any sort of near-term pullback in activity or profitability, I could definitely see shares moving higher from here.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.