TPC - Tutor Perini: Assessing When Shares Can Finally Rally

2023-04-21 13:46:54 ET

Summary

• TPC's earnings came in very disappointing in fiscal 2022.
• Backlog however has strong potential for growth.
• Strong operating cash flow generation continues to strengthen the balance sheet.

Intro

We wrote about Tutor Perini (TPC) back in October of last year when we stated that a retest of the stock's 2020 lows was a distinct possibility. Shares unfortunately have continued their descent as the stock is down roughly 10% since we penned that piece roughly 6 months ago. Although 10% may be the reported negative return, the real return in TPC is far more when we consider how inflation has remained elevated in past months along with the fact that the S&P500 actually returned approximately 10% during this timeframe.

As we see below, the sustained pattern of lower lows could see TPC break below near-term support shortly and hurl the company's shares down toward its all-time lows. Therefore, to this effect & from an investor's standpoint, the quicker this happens, the better. We state this because although Tutor Perini's recently reported fiscal 2022 numbers look extremely disappointing from an earnings and growth standpoint, we still maintain investors will ultimately step in here if indeed Mr. Market offers the stock at the right price point.

Fiscal 2022

For example, Tutor Perini reported $3.79 billion in top-line sales for fiscal 2022, resulting in a disappointing negative net profit print of $210 million for the full year. This number was obviously a significant drop from fiscal 2021 where over $91 million in profit was reported for the year. However, what investors need to decipher here is whether the reasons for the significant drop off in TPC's fiscal 2022 earnings are temporary in nature or whether the fundamentals of the firm have been impaired somewhat in this latest cycle.

We believe it is the former which can be clearly demonstrated by the company's expected snap-back return to bottom-line profitability next year (EPS of $0.45 per share expected). Remember, the income statement is essentially an accounting document that unfortunately was hit atrociously hard in TPC's latest fiscal year. Between settlements, extra charges (Which were front-loaded on the income statement) as a result of work that was not initially approved, and various judgments, TPC's net loss of $210 million equated to a reported diluted earnings loss of $4.09 per share. Therefore, it is fair to say that fiscal 2022 earnings were adversely affected in two ways. One by lower sales due to the Civil segment continuing its poor showing last year and two, the above-mentioned accounting costs which were significant in nature.

Backlog Potential

Therefore, by looking at the current backlog as well as what is coming down the track for Tutor Perini in terms of rubber-stamped projects, we should be able to get a handle on how sales and earnings are expected to trend going forward. For example, prior to the pandemic back in 2019 (When shares were trading much higher as we see above), Tutor Perini's backlog topped $11 billion. It currently comes in at $7.9 billion but management believes the company is in prime position to secure the construction of the New York City Brooklyn Jail as well as four California projects. If the awards are granted, this would immediately lift the backlog above pre-pandemic levels to $11.3 billion.

Then on the pipeline front, you have the JFK Ground Station center, the multi-billion dollar Queens jail project, and the $2+ billion Honolulu rail project which all have the potential to significantly increase the value of Tutor Perini's backlog. Obviously, the speed at which the company can get through its current backlog is also vitally important but trading conditions seem to be opening up for engineering & construction companies where funding from the Bipartisan Infrastructure Fund should continue to act as a strong tailwind.

Strong Operating Cash Flow

Operating cash flow hit a record in fiscal 2022 coming in at $207 million. Management believes this trend will only accelerate in the coming year as disputes between TPC and its customers finally seem to be coming to a head. Suffice it to say, if this trend can gain traction here, investors must remember that Tutor Perini still has well over $3 billion in receivables on its balance sheet. Therefore, risk will continue to come down if strong cash flow generation can be used to improve the company's cash position as well as bring down long-term debt on the balance sheet.

Conclusion

Although from an accounting front, Tutor Perini reported a very poor set of results for fiscal 2022, operating cash flow numbers were buoyant and the backlog has strong potential going forward. As mentioned earlier, the perfect storm would be for the stock to drop to its 2000 lows which may present a strong multi-year buying opportunity. We look forward to continues coverage.

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