NWPX - Northwest Pipe Company: Challenging Quarter Brings Future Performance Into Question

2023-06-28 11:45:58 ET

Summary

• The Biden administration's investment into water infrastructure could be a significant benefit for Northwest Pipe Company, a company that offers steel pressure pipes and precast infrastructure.
• The latter segment has strong growth potential, especially with the need for water infrastructure upgrades across the US.
• Safer times to buy shares would be when orders for the Precast segment are increasing and overall top and bottom line growth is seen.

Investment Rundown

Investments into water are seemingly streaming in, as the Biden administration aims to spend $50 billion to build out and upgrade existing water infrastructure in the US. This should be a major tailwind for a company like Northwest Pipe Company ( NWPX ) which operates with exactly this, offering customers steel pressure pipes and the precast infrastructure that comes along with it.

Despite these seemingly strong tailwinds going forward, the first quarter to 2023 proved to be quite challenging for NWPX and they posted a top and bottom line decrease on a yearly basis. This recent performance does bring the future performance of the company into question. Customer-driven production delays were mentioned as a reason for the closing revenues. What does hold me off from rating NWPX a sell at this point is the proven track record they have had in growing its backlog, reaching record levels of $370 million in Q1 2023. That should provide ample revenues and decent demand going forward until the investments from the administration are materialized. Rating NWPX a hold.

Company Segments

Northwest Pipe Company was founded back in 1966 and has its headquarters in Vancouver, WA. Since then, NWPX has grown into the largest and most flexible company in its market regarding water transmissions. During their many years of operations, they have built 13 different manufacturing facilities throughout the US. Also building up strong relationships with agencies, engineers, and contractors has aided them in growing their business sustainably through the years.

As for segments within NWPX, there are two currently. These are as follows, the Engineered Steel Pressure Pipe Segment ((SPP)) and the Precast Infrastructure and Engineered Systems Segment (Precast). The division between the two isn't that large and last quarter around 66% of the revenues come from the SPP segment.

Markets They Are In

Operating in the water infrastructure market, NWPX offers customers a varied set of steel pressure pipes, which has a market opportunity of $450 - $600 million according to the company's estimates. As of right now, NWPX holds around 55% of the market and therefore is the largest operating in it. This leaves some room for the company to increase its presence even further in the industry, but I think the largest opportunity is found within the second segment of the business, the Precast segment.

Here the growth potential seems very strong and NWPX has a lot of potential market share they can take from competitors if they can leverage their position efficiently. Water infrastructure investments are necessary across many parts of the US and with NWPX having facilities across the country it leaves them in a strong position to be a main manufacturer for this needed infrastructure upgrade.

In both Texas and California, the need to upgrade infrastructure is very high, and NWPX has facilities in both states. Where this growing demand can be seen in NWPX is the growing order backlog for the Precast segment, which went from $11 million in 2020 to $64 million in 2022. The tailwinds are certainly coming from this part of the company, but time will tell whether demand is here to stay is seasonal.

Earnings Highlights

As mentioned in the introduction to the article, the first quarter to 2023 proved to be a challenge for NWPX as both the top and bottom lines of the company decreased YoY. Challenging weather conditions and customer-driven production delays caused the decrease. However, the most positive news from the quarter has to be the SPP segment racing a record backlog of $370 million.

Looking at the statement above, we can also see that the shares outstanding have been increasing on a yearly basis, which hurts the long-term investment outlook. A dilution of 1.1% per year might not seem extreme, but it does add up over time if NWPX continues to have quarters like Q1 2023, where growth was halted and instead reverted.

Looking at the cost of sales for the SPP segment, it fell faster than the sales did, which indicates to me that NWPX is experiencing better pricing for their materials and should be able to grow margins if they see increased demand and higher customer production activity.

Looking ahead to Q1 2023 CEO Scott Montross said the following, “We expect our second quarter Precast revenue to improve over the first quarter of 2023 and for the Precast segment's full-year performance to be down only modestly from a record year in 2022 with similar margin levels." I think investors should expect any catalyst in the short term, which seems to come when backlogs are up massively for the Precast segment, which will likely be the driving force of growth within NWPX.

Risks

I said the most exciting part of NWPX has to be the Precast segment which focuses on precast and reinforced concrete products. The TAM is far larger than the SPP segment here and I think disappointing growth is what will keep NWPX trading at a low multiple like it currently does.

The disappointing decreasing backlog on a QoQ basis seems to have helped further make the share price trade under the $35 threshold. The stressed residential market seems to have been a cause for this decline, and until that market recovers I don’t think we will see any significant growth in backlog orders, unfortunately. That will put pressure on NWPX to find growth elsewhere instead.

Industry Comparison

Looking at a similar company in the industry, we have Concrete Pumping Holdings, Inc. ( BBCP ). A company that focuses on providing concrete pumping and waste management in the US and UK.

As far as valuation goes between NWPX and BBCP it seems Northwest is the leader with a FWD P/E of 10 compared to BBCP with 15 . Margin-wise, BBCP is far ahead with gross profit margin reaching over 40% and net margins of 7.98%. NWPX has had decent margin maintenance so far this year and I am hopeful we will see it further expand in the coming quarters if demand picks up. But for now, it doesn't present itself as the better option from a margin perspective. But when taking into account the significant market presence they have and the solid TAM opportunity for the Precast, I see more value found in NWPX in a decade than with BBCP.

Final Words

Right now, I think it's better to hold shares in NWPX, even if the share price has plummeted over 12% this year so far. The decrease in order backlogs in the segment I view as the driving force for growth is a disappointment and doesn't play well with a bullish thesis.

The investments the Biden administration is making into water infrastructure should be a major benefit to companies like NWPX which has strengthened relationships with government agencies throughout its operational time. Even with an FW D P/E quite low at 10, I do think there are safer times when investors could buy shares in the company. That would be when orders are increasing again for Precast and overall top and bottom line growth is seen. Until then, I view NWPX as a hold.

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