Author Topic: AGX - Argan Inc.  (Read 5421 times)

Patmo

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AGX - Argan Inc.
« on: June 21, 2014, 07:19:45 PM »
I don't know when this popped up on the magic formula list but I'm pretty excited I "discovered" it before I saw it there. I'm sure other people have done some research on this company, so I figure might as well open up a thread.

Argan is a holding company whose major subsidiary (95%+ of Argan's revenue), Gemma Power Systems or GPS, is a wholly owned engineering/construction company specializing in power plants of all sorts. It offers a broad range of services such as development, consulting, engineering, procurement, construction, commissioning, operations and maintenance services. An interesting point to note is that the company boasts expertise in both traditional and alternative energy projects.

When I took a position a mere month or 2 ago, I took a basket of similar companies that Argan listed as its competitors to compare against, and they turned out to average about 7. Shares were trading at a little under $30 for 4.62 EV/EBITDA giving an implied value of about $45.

Where it gets interesting though, is that the last year wasn't too hot for the company. But they've built up a massive backlog of projects amounting to close to $900 million as at EOY 2013, 5 times more than the prior year. So I didn't do any calculations, but it stands to reason that looking 2-3 years out, the valuation is much cheaper than the already attractive TTM would suggest.

On paper, Argan/Gemma appears very well managed. Year after year the company posts healthy ROE and ROA numbers. For example, despite an increasingly garguantuan cash drag ($314mil of its $372mil total assets were cash as of April reports), the company posted 13% ROA last year. I guess this suggests the company is light on the construction side and heavier on the consulting side in terms of services it offers. Anyway, I digress, someone more in the know could tell you all about it.

As you would expect of a company with this much cash on its balance sheet, Argan is well positioned financially. Cash net of all liabilities alone amounts to $7 per share. This excludes the $1.35 special dividends paid out in the last two years.

Management as a whole own a bit over 10% of the company. The most invested is William Griffin, CEO of GPS, with over 700 000 shares. Second in line is Rainer Bosselman, CEO of Argan at 425 000 shares. Despite Mr. Griffin's largely bonus-weighted compensation (2.5mil of 3.1mil total for 2014), I believe the number of shares he owns (close to 8x the value of his compensation for the year) keeps his interests in line with shareholders. I suspect that the bonus award has something to do with the large project backlog for the year.
« Last Edit: June 21, 2014, 07:35:59 PM by Patmo »


Myth465

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Re: AGX - Argan Inc.
« Reply #1 on: June 21, 2014, 09:56:55 PM »
Thanks for the reminder.
There was a good VIC write up on this 1 year ago.
I passed because I didnt know if they would get the 2 projects.

That was a mistake, its up 116%......
With that monster cash horde, its still cheap. Any idea on what they plan to do with the cash?

Patmo

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Re: AGX - Argan Inc.
« Reply #2 on: June 22, 2014, 06:39:35 AM »
I have zero clue, but I don't mind what they do with it.  Whatever they do should be in both the company and the shareholder's best interests.

So, I did some quick calculations and it appears the company is currently trading at EV/EBITDA about 6. Pretty cheap for a company with a high performance history. Looking out 2-3 years, if this approx. $900mil backlog means $400mil of revenue, EBITDA could reach $80-120mil, say $100mil. At current cash+debt levels the pps would have to be $49 just to maintain the same EV/EBITDA ratio.

P/E wise, if the company maintains last year's net margin levels, net earnings could be up to $4.8ps. Say $4. Without any PE expansion, the shares would trade around $50 in 2 years. At $33pps, and including the $7 free cash, you effectively get about a buck for 50 cents at current share price.

Using those estimates, both ratios show that the company could be worth $50ps a couple years out, excluding any ratio expansion (which are already quite low for a company with such lovely historical performance).

stahleyp

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Re: AGX - Argan Inc.
« Reply #3 on: June 22, 2014, 12:34:49 PM »
I know it was on the magic formula list at least in Sept of 2010. I bought some back then because of it. I sold it at a nice profit...but wish I would've held on longer! haha
Paul

Faustus

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Re: AGX - Argan Inc.
« Reply #4 on: June 22, 2014, 04:15:44 PM »
It is important to recognize the accounting for construction: a large portion of that cash comes from the liability account "billings in excess of cost."  From this account, we can see that half of the cash results from a timing difference: billing early.  The good news is that their projects are well funded.
"The stars move still, time runs, the clock will strike"

Myth465

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Re: AGX - Argan Inc.
« Reply #5 on: June 22, 2014, 07:15:12 PM »
Good point.
Also for them to maintain the same PE, they would need to replace the 2 orders they have with new orders which isnt guaranteed.

Graham Osborn

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Re: AGX - Argan Inc.
« Reply #6 on: August 01, 2017, 07:21:57 AM »
Does anyone know why the CEO has sold off over half of his stock?  For a company with historically good shareholder alignment and a lot riding on building the backlog in a service business grafted on a cyclical industry, this is kind of a hangup for me.
« Last Edit: August 01, 2017, 07:23:49 AM by Graham Osborn »

mttddd

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Re: AGX - Argan Inc.
« Reply #7 on: August 01, 2017, 08:51:44 AM »
I know it was on the magic formula list at least in Sept of 2010. I bought some back then because of it. I sold it at a nice profit...but wish I would've held on longer! haha

Yep same boat for me, I logged into an old brokerage account of mine a few weeks ago and it was still on my watchlist there. Was surprised to see how far it ran

muscleman

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Re: AGX - Argan Inc.
« Reply #8 on: December 08, 2017, 08:09:24 AM »
Anyone buying AGX?
Backlog cut in half and stock price tanked.

Very strong balance sheet and low P/E.
Looks like Prem Wasta bought some earlier this year.

watsa_is_a_randian_hero

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Re: AGX - Argan Inc.
« Reply #9 on: December 08, 2017, 09:28:25 AM »
Anyone buying AGX?
Backlog cut in half and stock price tanked.

Very strong balance sheet and low P/E.
Looks like Prem Wasta bought some earlier this year.

I've owned for a couple years now.  bought more recently.  I think management will continue to grow over the longer term despite some softness in recent backlog.
« Last Edit: December 08, 2017, 10:05:49 AM by watsa_is_a_randian_hero »