WLDN - Willdan Group's Wild Ride

2023-03-07 14:35:46 ET

Summary

• Thinly traded shares of consulting firm Willdan Group, Inc. plunged 61% in a two-month (August to October 2022) period on no significant news.
• The company had downwardly revised its FY22 top-line outlook two weeks prior to the meltdown, but a lack of news seems to have stirred investor concern.
• With a significant 3Q22 beat triggering a 29% one-day rally and management optimism regarding FY23, the recent beneficial owner buying merited further investigation.
• A full investment analysis of Willdan Group, Inc. follows in the paragraphs below.

News is something somebody doesn't want printed; all else is advertising ."? William Randolph Hearst.

Today, we put an interesting services firm in the spotlight for the first time. The shares have been very volatile lately and are thinly traded. They also have picked up some insider buying. An analysis follows below.

Company Overview:

Willdan Group, Inc. (WLDN) is an Anaheim, California-based provider of professional, technical, and consulting services to utilities, government agencies, and private industry. Although it has offices in 22 states, Washington DC, and Alberta, Canada, the firm's utility and public agency business is concentrated primarily in California, New York, and Arizona. Willdan was formed in 1964 as an engineering services provider to budding suburban municipalities and went public in 2006, raising net proceeds of $20.4 million at $10 per share. The stock trades for around $18.00 a share, translating to a market cap of just north of $235 million.

Segments & Revenue Disaggregation

Willdan Group, Inc. has two operating segments: Energy and Engineering & Consulting.

Energy is comprised of energy efficiency consulting and engineering services, whereby the firm offers "program design, management, and administration; marketing, customer outreach, and project origination; energy audits and feasibility analyses; implementation; training; management; retro-commissioning; data management and reporting; measurement and verification services; and construction management," as well as attendant software licenses to utilities, their customers, and government agencies. It also consults on other Agenda 2030 matters, such as peak energy demand, greenhouse gas emissions, water conservation, etc.

With all the emphasis on renewable energy over the past decade, this segment has grown significantly, seeing its top line jump from ~$29 million in FY10 to $210.0 million during the first nine months of FY22 (YTD22). Its contribution as a percentage of total revenue has risen from 37% to 80% over the same period.

Engineering & Consulting includes building and safety services, city code enforcement, civil engineering services, disaster recovery, earthquake engineering, surveying, program and construction management, structural engineering, traffic and transportation services, water resource management, financial consulting, and federal compliance services. The preponderance of these offerings are sold to government agencies, having generated YTD22 contract revenue of $51.6 million, or 20% of total.

From a customer perspective, utilities are responsible for 55% of Willdan's YTD22 top line, with government (36%) and commercial sector (9%) accounting for the balance. Its somewhat niche services compete with similar offerings from six other concerns whose 2021 contract revenue ranged from $150 million to $500 million. (Willdan generated contract revenue of $354 million in FY21.)

There are three types of contracts: time-and-materials; unit-based; and fixed price. They typically range from $1,000 to $10 million and have a duration between two and 36 months, although many are renewed or re-awarded for decades. Time-and-materials comprises nearly 80% of the Engineering & Consulting revenue and a quarter of the firm's total. Unit-based requires the delivery of specific goals or work (e.g., energy efficiency savings goals measured in kilowatt hours) with total payment determined by the number of events or units performed (kilowatt hours saved). It accounts for approximately five-eights of the Energy sector's revenue and slightly more than half of total. The balance (21% of total in YTD22) is generated from fixed price contracts. Normally, Willdan has ~2,000 projects ongoing at any time. That said, approximately 55% of the firm's revenue is derived from its top ten customers.

Stock Price Performance

Largely due to acquisitions and growth in its energy efficiency segment, revenue at Willdan grew at a 33% CAGR in the five years preceding the pandemic, and the market paid it back handsomely, returning 666% from its closing 2013 price to its peak (of $40.70) in 2019. Extremely thinly traded shares of WLDN then down-drafted to $17.92 during the pandemic-induced selloff in March 2020, only to rally 207% to their all-time high of $54.99 in February 2021.

The rebound was a function of the company having contracts involving essential functions during the pandemic, and as such, the market bestowed it with multiple expansion. At its peak in 2019, Willdan's stock traded at a 17.9 multiple to FY19 non-GAAP earnings of $2.27. By contrast, its all-time high in 2021 represented a 35.5 multiple on FY21 non-GAAP earnings of $1.55.

Understandably, with the onset of the pandemic the firm's run of strong top-line growth reversed, with contact revenue dropping 12% from $443.1 million in FY19 to $391.0 million in FY20. That reversal became a trend in FY21 with contract revenue falling another 10% to $353.8 million. Up to a point, bulls argued that what mattered was the net revenue line, which subtracted out direct costs, such as materials, subcontractor services, and equipment. Net revenue only declined 3% in FY20 (to $194.5 million). However, the arguably more important metric only rose 4% in FY21 to $201.5 million. Sensing that its solid run of substantial growth was over, investors began bailing after its early 2021 peak, initiating a protracted decline to just under $30 a share prior to its 2Q22 financial report.

As part of that announcement - that missed Street expectations by $0.25 a share (non-GAAP) - Willdan stated that is FY22 net revenue would only grow "at least 10%" from "roughly 20%" and Adj. EBITDA margin would be "at least 10%." The Street had been looking for FY22 net revenue of $239.3 million, or ~$15-$20 million above the new guidance, for which there were two main drivers. First, the firm stated headwinds (in the form of elongated timetables) to deliver energy efficiency programs with the four major investor-owned utilities (IOUs) in California. Modifications had been made to the unit-based contracts to make it easier for Willdan to receive remuneration, but a lot of cash had been expended upfront with little to show for it to date. Second, the company derives meaningful (although lumpy) revenue from software licenses and there had not been any significant new licenses in the quarter or anything definitive on the horizon.

Since no one seemed to initially notice or care - shares of WLDN were down 6% on volume of 36,500 shares in the subsequent trading session - the stock held together for two weeks. However, without any press release trumpeting a new contract or software licensing deal, the firm's stock began a dramatic slide on very little volume - only eclipsing 100,000 shares on four days - falling 61% from the August 18, 2022 close of $28.37 to an intraday low of $10.98 on October 14, 2022, a level not seen since 2016.

3Q22 Earnings & Outlook

Finally, a press release announcing the award of a three-year $57 million energy efficiency contract with a utility on October 20, 2022 stemmed the decline until Willdan reported its 3Q22 financials on November 3, 2022. It posted non-GAAP earnings of $0.42 a share and Adj. EBITDA of $8.0 million on contract revenue of $121.4 million (net revenue of $58.9 million) versus $0.53 a share (non-GAAP) and Adj. EBITDA of $10.1 million on contract revenue of $98.3 million ($54.5 million) in 3Q21. The year-over-year 21% decline at the bottom line was due to fewer high-margin software licensing deals. That said, earnings beat Street expectations by $0.24 a share and triggered a one-day 29% rally to $16.77.

Management maintained its guidance of at least 10% net revenue growth and at least 10% Adj. EBITDA margin for FY22.

Balance Sheet & Analyst Commentary:

Cash flow from operating activities for the quarter was $8.1 million, bringing YTD22 into the black at $4.5 million. As of September 30, 2022, Willdan held cash and equivalents of $8.8 million against debt of $109.4 million, placing net leverage at 4.8.

The Street is very bullish on the firm's outlook, bestowing it with one outperform and three buy ratings. That said, both EF Hutton and Wedbush lowered price targets after the company's 3Q22 financial report, the former from $32 to $24 and the latter from $35 to $16, which was attained in the subsequent trading session. On average, they expect Willdan to earn $0.92 a share (non-GAAP) on net revenue of $226.8 million in FY22, followed by $1.46 a share (non-GAAP) on net revenue of $267.2 million, representing a meaningful return to growth - 59% at the bottom line and 18% at the 'net' top line as the California IOU unit-based contracts begin to pay off.

While the stock is rebounding, Alabama based beneficial owner Forager Fund has been adding to its position, accumulating 63,293 shares between January 24-26th.

Verdict:

Willdan Group, Inc. stock is not for the faint of heart. One can look really stupid or really smart without any change to Willdan's outlook. It currently trades at roughly 12 times P/E on FY23E EPS estimates, a price-to-FY23E net revenue of under .9 and an EV/TTM Adj. EBITDA of 15.6. The former two are forward looking and represent reasonable valuations for an industry that will likely grow significantly over the next decade. The latter is backward looking, and the bet here is that the denominator will improve significantly in FY23 as the California IOU contacts get traction.

Willdan Group, Inc. stock has way too thin of float for a large stake. However, a small " watch item" holding seems merited, but in a stock as illiquid as this one, legging into a position is recommended.

News is only the first rough draft of history ."? Alan Barth.

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