Primoris Services Corporation (PRIM, $26.43): “PRIM Looks Prime to Perform”
By: Dominic
Brisson, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
Summary
• Primoris Services Corporation (NASDAQ: PRIM) is an engineering and
construction company providing construction, fabrication, maintenance,
replacement, and engineered services. PRIM operates in the US where 97% of
revenues are generated with remainder coming from Canada.
• In early August, PRIM held
their Q2 ’21 earnings call and reported diluted EPS of $0.67 lower than the
consensus street estimates of $0.72 a share. In addition, PRIM logged $881.6MM
revenue for the quarter in line with the street estimates.
• PRIM reorganized their business
segments from five to three in Q1 ’21 to streamline the company’s operations
and position the company to take advantage of cross-selling opportunities.
• Through FIH, PRIM secured a
5-year MSA agreement from the Rural Digital Opportunity Fund (RDOF) where the
US aims to spend $20B+ building out rural broadband over the decade.
• PRIM’s renewables business
continues to expand, and they have $350MM in solar projects in backlog and
$900MM+ in prospective projects likely to be finalized in the coming months.
• PRIM was recently awarded a
$100MM thermal power project that will wrap up in Q2 ’22 and the revenue from
the work will be reported in the company’s Energy/Renewables segment.
• PRIM reached a new record with master
service agreement (MSA) revenue in their backlog. As of Q2 ’21, 52% of PRIM’s backlog
was MSA-based representing $1.5B in future projects.
Key
points: Through 6 months ending 6/30/21, PRIM
generated a record high $1.7B in revenues. This was impressive considering a
bad winter storm disrupted business in Texas for one week during Q1 and wet
conditions in the South and Southwest disrupted Q2. The negative effects of poor
weather conditions where PRIM has geographic revenue exposure were ultimately offset
by the Future Infrastructure Holdings (FIH) acquisition which helped PRIM generate
an additional $134MM in revenue through 6/30/21.
In Q2
’21, the Utilities segment performed well with revenue increasing 25% YoY driven
by the FIH acquisition and increased business from utility customers in
California. Gross profit as a percentage of revenue in this segment decreased
due to poor weather and costs associated with FIH. In the Energy and Renewables
segment, revenues increased 20% YoY largely due to greater activity in the
renewables space. Gross profit margins also increased from 7% to 10% YoY due to
more favorable contracts. The pipeline segment suffered with revenues decreasing
58% during Q2 YoY which was offset by higher gross margin due to multiple projects
finishing.
PRIM
finished reorganizing their business segments to better streamline their
operations and enhance cross-selling opportunities. PRIM’s new Utilities
segment now encompasses the old Utilities and Transmission & Distribution
segments and they will also report FIH’s operations in the segment. The new
Energy segment encompasses the old Power and Civil segments, and the new Pipeline
segment is unchanged. By consolidating the segments, the company believes this
will greatly enhance PRIM’s ability to capitalize on their diverse service
offerings and offer complete engineering and construction solutions to
customers.
By example, in mid-August PRIM
secured a new $100MM contract to complete the engineering, procurement, and
construction work for a 200MW thermal power in the Southwest. With this
contract, PRIM took advantage of its cross-selling opportunities as the scope
of work involves their Utilities segment (Electrical Transmission & Distribution
work) as well as the Energy and Renewables segment (Power Plant and Civil
Construction work).
With Future Infrastructure
Holdings (FIH), PRIM is positioned to benefit from continued synergies as they
integrate the business into their Utilities segment. FIH had a 20.5% gross
profit margin as of year-end 12/31/20 and they are 70% complete with the
integration and have incurred most costs associated with it. Recently, PRIM
announced FIH secured a 5 year MSA contract with the Rural Digital Opportunity
Fund to provide telecom infrastructure construction services to rural
communities in the South.
PRIM’s renewables business continues
to expand. They currently have $350MM of backlog in solar projects for 2021 and
2022. Looking ahead, they have $900MM in prospective solar projects that are
being worked on under a Limited Notice to Proceed that are expected to close in
the next 6 – 12 months. As the US continues to pursue renewable expansion through
new infrastructure bills and a greater focus on green energy, PRIM will benefit
as they help construct America’s clean energy infrastructure of the future.
What
has the stock done lately? The past 3 months have been rocky for PRIM
since the stock has been very volatile and it largely trended down. From the
period June 19, 2021 – August 19, 2021, PRIM decreased 24.1% while the Russell
2000 went down 3.5% during the same period. PRIM fell the most from June 9,
2021 – June 18, 2021, when the broader market pulled back when fears around the
Delta Variant were high. After this plummet, PRIM experienced a choppy 6 weeks
and declined greatly after missing consensus street earnings estimates by
$0.05.
Past
Year Performance: PRIM increased 37.1% in value over the past year. PRIM’s
share price increased from November with the positive vaccine news and through
mid-March while they rode the infrastructure buzz and has since declined after the
announcement of the FIH acquisition when they completed a secondary equity
offering diluting existing shareholders.
My
Takeaway
PRIM has underperformed since
being added to the AIM Small Cap Equity Fund in April ’21 and trades below our price
target of $42.33. In August, the US Senate voted on an infrastructure bill that
passed with bipartisan support, and this bill still awaits passing in the House.
Under the new bill, PRIM can benefit from the planned $110B spending on
transportation infrastructure, $65B on the electrical grid, and $65B in
spending on broadband internet access projects in rural areas. In addition,
PRIM’s relative valuation against its peer group was reevaluated. PRIM’s FY ’21E
P/E of 10.3 remains lower than the weighted peer average of 16.9. The ~40%
discount on a P/E basis is probably due to the secondary equity offering the
company made in March to pay down revolver debt and investors’ concerns
regarding PRIM’s exposure to Oil & Gas with pipelines. However, at ~10X FY
’21E earnings most downside is baked in, and the market is not rewarding PRIM
for the growing player in renewables they are, the construction role they can
play in an infrastructure focused decade, and their new presence in telecom infrastructure
through FIH. Due to the construction sector having favorable trends in
renewables and infrastructure coupled with PRIM continuing to trade below other
leading small cap construction services providers, our fund should continue holding
this position and potentially consider increasing our stake.
