BWMN - Bowman Consulting Group Sees Increased Organic Growth As Acquisitions Continue

2023-10-13 14:03:15 ET

Summary

• Bowman Consulting Group Ltd. provides engineering and construction management services in the U.S.
• The company's recent financial trends show growth in revenue but negative earnings in the most recent quarter.
• The stock has seen significant appreciation but may have reached a plateau.
• I'm Neutral [Hold] on Bowman Consulting Group Ltd. for the near term.

A Quick Take On Bowman Consulting Group

Bowman Consulting Group Ltd. ( BWMN ) provides engineering and related construction management services to companies and public entities located in the United States.

I previously wrote about Bowman's 2021 IPO with a Buy outlook.

The stock has seen significant appreciation in the past twelve months but may be reaching a plateau at its current level, absent a substantial organic or M&A catalyst.

I’m Neutral [Hold] on BWMN for the near term.

Bowman Consulting Overview And Market

Virginia-based Bowman was founded to provide various project planning, commissioning and engineering services to property owners of all types.

The firm is led by founder, Chairman and CEO Gary Bowman, who is a licensed engineer and has over 40 years of experience.

The company’s primary offerings include:

• Planning

• Engineering

• Construction management

• Commissioning

• Environmental consulting

• Geomatics

• Surveys

• Land procurement

• Technical services.

According to a 2023 market research report by Grand View Research, the global civil engineering market size (as a proxy) was an estimated $8.6 trillion in 2022 and is expected to reach $13.6 trillion by 2030.

This represents a forecast CAGR of 5.7% from 2021 to 2028.

The primary reasons for this expected growth are continued rapid industrialization and urbanization in emerging growth economies.

Also, in developed countries, there is an increasing need for the development of high-quality infrastructure, and that is expected to add demand over the coming years.

Below is a chart showing the historical and projected future size of the U.S. civil engineering market by service type:

Major competitive or other industry participants include:

• WSP

• Fluor Corp

• AECOM

• Arup

• Jensen Hughes

• KJWW/TTG

• Vanderweil Engineers

• Syska Hennessy Group

• Henderson Engineers

• Simpson Gumpertz & Heger

• Walter P. Moore.

Bowman Consulting’s Recent Financial Trends

Total revenue by quarter has continued to grow, although operating income by quarter has dipped into negative territory in the most recent quarter.

Gross profit margin by quarter has varied within a narrow range; Selling and G&A expenses as a percentage of total revenue by quarter have produced no discernible trend.

Earnings per share (Diluted) have produced volatility, with the most recent quarter generating negative earnings.

(All data in the above charts is GAAP.)

In the past 12 months, BWMN’s stock price has risen 83.0%:

For balance sheet results, the firm ended the quarter with $9.7 million in cash and equivalents and $37.9 million in total debt, of which $21.2 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $5.8 million, during which capital expenditures were $1.2 million. The company paid $19.0 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.

Valuation And Other Metrics For Bowman Consulting

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Based on the DCF, the firm’s shares would be valued at approximately $23.56 versus the current price of $27.12, indicating they are potentially currently fully valued.

Sentiment Analysis

The chart below shows the frequency of various keywords in management’s most recent quarterly earnings conference call.

The chart indicates there were relatively few mentions of negative keywords.

Analysts asked management about synergies from acquisitions, revenue backlog dynamics and U.S. Federal infrastructure funding activity.

Management responded that revenue synergies from acquisitions are an important contributor to the firm’s growth.

Revenue backlog from the transportation vertical can be highly variable, but leadership sees significant opportunities in the second half of 2023.

Management is also anticipating closing new opportunities that are driven by federal funding.

Also, the company has been positively surprised by the rebound in the homebuilding industry.

Commentary On Bowman Consulting

In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management’s prepared remarks highlighted the completion of five acquisitions, adding $36 million of net service revenue in the process.

Also, the company's backlog grew independent of acquisitions and has achieved a book-to-burn ratio of more than 1.

Subsequent to the end of the quarter, the company has announced additional acquisitions.

Total revenue for Q2 2023 rose by 32.7% year-over-year, and gross profit margin increased by 0.2%.

Selling and G&A expenses as a percentage of revenue increased by 1.2% YoY while operating income fell to negative ($1.3 million) versus a positive $0.5 million in the year-ago period.

The company's financial position is moderate, with some liquidity, more debt and moderate free cash flow.

The firm will need to refinance a significant amount of its debt within the next 12 months at a likely higher interest rate.

Management has increased its revolving line of credit from $50 million to $70 million to give it more potential for acquisitions.

Bowman ended the quarter with a net leverage ratio of 1.5x on trailing four-quarter adjusted EBITDA.

Looking ahead, management increased its forward net service billing guidance to $307 million at the midpoint of the range.

Adjusted EBITDA guidance also rose to $49 million at the midpoint.

In the past twelve months, the firm's EV/EBITDA valuation multiple has risen by 80% but appears to have plateaued in recent quarters, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include further project wins from U.S. Federal government infrastructure spending and continued growth in homebuilding-related projects.

However, the stock’s runup in the past 12 months appears to have stalled, and management will need to take the company to the next level to produce material upside from its current price of around $27.00

Until we see a significant catalyst, my outlook on Bowman Consulting Group Ltd. is Neutral [Hold] in the near term.

For further details see: