TPC - Tutor Perini: Recovering But Consistent Margins Need To Be Achieved

2023-07-25 06:08:40 ET

Summary

• Tutor Perini Corporation, a construction management-oriented company, is returning to its former self with expanding margins and the potential for more revenue due to a massive bill signed previously.
• TPC has shown significant growth in the backlog, adding $3.2 billion in the first quarter of 2023, but volatile revenues are likely to persist due to the progress of ongoing projects.
• Despite the construction sector's challenges, including rising material costs and market fluctuations, TPC's financial position is healthy, with a steady cash position and a healthy ratio between cash and debt.

Investment Rundown

A construction management-oriented company might not sound that appealing to investors, not when we have the whole hype around AI stock still going. But I think Tutor Perini Corporation ( TPC ) right now is disguised as a very solid opportunity as they are returning to their former self with margins expanding. TPC has consistently been able to generate revenues far above their market cap, the p/s right now is just 0.12. But there seems to be more revenue potential ahead as the massive $1.2 trillion infrastructure bill signed previously is setting up plenty of tailwinds for companies like TPC.

The first quarter of 2023 showed significant growth in the backlog, adding $3.2 billion. This is securing revenues for times ahead and I think TPC now needs to prove it can scale this and build out its infrastructure. Volatile revenues are likely to persist though with significant QoQ differences depending on the progress of ongoing projects. I tend to be quite pessimistic when evaluating companies and prefer having a very margin of safety, but also a consistent historical record of profitability I can look back on. Right now TPC doesn't have that, but as outlooks are positive I will have them as a hold rather than a buy.

Company Segments

TPC operates as a construction company in the United States with projects all over the country. They provide a variety of services that have helped them grow into the position they are in. Diversified general contracting and construction management are some of these.

TPC has structured itself with three different segments, those being Civil, Building, and Specialty Contractors. The first segment focuses on engaging in public works construction but also the replacement and reconstruction of existing infrastructure or buildings.

The company has a significant track record of large projects which has put them in the position where they are. Some of these include the Los Angeles MTA Purple Line Sectors 2 & 3 valued at $3.3 billion. The second segment offers primarily a range of different services aimed at specialized building projects and markets.

The company relies heavily on ensuring they have a strong backlog of orders. This creates reliable future revenues and enables TPC to make investments and capital allocations more strategically. Seeing as the largest segment is the Civil one, the largest amount of backlog orders are here too, amounting to $4.4 billion in total. As with many companies, seeing steadily growing backlogs are important, but I'd argue for a company like TPC it's far more important than it might be in other industries. It's an industry where growing backlogs reflect an optimist market environment but a slowing one brings a lot of risks into the equation. If economic activity is slowing the large amount of assets that TPC has becomes a liability instead. They need to keep a high operation ratio where "gross property plant & equipment" don't stand unused.

Markets They Are In

TPC is included in the construction and engineering industry where they serve a large pool of customers. The strong position they hold though makes them very much able to benefit from strong investments into infrastructure for example as they market themselves as an obvious choice. With a close relationship with the government, they are more prone to get long-fixed contracts that secure revenues reliably.

The most profitable part of TPC is in its Civil segment, where a large portion comes from government sources. The target in the segment is an operating margin between 10 and 12%. Many of the projects are focused on larger sizes, often valued at over $1 billion. Besides the significant amount of investments into the space, the highly active bidding environment is helping drive higher revenues and project valuations for TPC.

Risks

The construction industry, including companies like Tutor, is subject to various challenges and risks, especially when dealing with large-scale projects. While Tutor's preference for large projects may offer lucrative opportunities, it also introduces certain complexities and uncertainties.

One of the significant risks in the construction sector, especially in recent times, is the rising cost of materials. The industry has experienced substantial inflation in construction materials, ranging from lumber and steel to concrete and copper. These escalating material costs can put significant strain on project budgets, potentially leading to cost overruns and impacting overall profitability. Moreover, supply chain disruptions and shortages can further exacerbate the situation, delaying project timelines and causing financial setbacks.

Large projects often entail longer timeframes, which increases exposure to market fluctuations and changing economic conditions. Economic downturns, changes in interest rates, or shifts in government policies can impact project funding and demand, potentially leading to delays or cancellations of large-scale projects. Such disruptions may adversely affect revenue and cash flow for companies like Tutor.

Earnings Expectations

On August 3 2023 TPC will be releasing their Q2 report for the FY2023. In terms of expectations by the market, the EPS is expected to make a significant jump upwards and post a slight loss, at $0.04 per share. As far as I am concerned there are still some difficulties in the scene and as long as rates remain higher the economic activity is likely to be dulled, harming earnings for TPC.

Some guidance for the rest of 2023 could set off the share price. If we see a positive look on the year and a possible recovery in 2024, then investors might be buying in now already to benefit from that. But if comments about persistent high costs remain, dulled EPS results will likely continue. What I am mostly looking at is the margins. A significant move toward profitability together with raised outlooks could if it stays consistent result in an upgraded rating in the future.

Financials

The financial position of TPC looks to me to be in a very healthy state right now. The cash position has been steadily climbing and sits at $282 million now, up from $259 in Q4 2022.

Comparing the cash to the debt we see that TPC has a very healthy ratio between the two. Long-term debt sits at just $66 million, which the cash position can cover several times over. Going forward I don't expect to see TPC increase their debt that much actually. They seem to be in a good state where investors can be funded by the 5.38% FCF margin they have.

Final Words

The construction sector can be difficult to invest in and the margins for TPC have been quite volatile to reflect material costs and other volatile parts of the industry. However, they have solid backlog levels and I don't doubt they won't continue to increase going forward. But without a solid and consistent net margin, the share price isn't trading based on fundamentals, and making a buy case becomes very difficult. As a result, I am rating TPC a hold for now.

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