2023-12-29 10:39:34 ET
Summary
- NV5 Global, Inc. reported a growing backlog and recent acquisition of Red Technologies, which could lead to net sales growth.
- Increasing selling and marketing expenses and accumulated know-how may result in revenue increases from data center services.
- Risks include failed acquisitions, goodwill impairments, and unsuccessful expansion, but NV5 looks relatively cheap.
NV5 Global, Inc. ( NVEE ) recently reported a growing backlog and the recent acquisition of Red Technologies, which I believe could bring net sales growth in the coming quarters. Also, with increasing selling and marketing expenses and the accumulated know-how, I think we could see revenue increases from the data center services offered. There are obvious risks from failed acquisitions, goodwill impairments, and unsuccessful expansion into new areas. However, NVEE does look relatively cheap.
NV5 Global, Inc.
NV5 Global, Inc. is a provider of technology solutions, conformity assessment, and consulting for public and private sector clients in the infrastructure, utilities, construction, real estate, environmental, and geospatial markets. It is headquartered in Hollywood, Florida, and operates from more than 100 locations in the United States and abroad.
It is a company with more than 11,000 clients, but its income is concentrated in the public sector. Primary customers include U.S. government agencies, institutions at the federal, state, municipal, and local levels, military and defense customers.
NV5 Global completed its initial public offering in March 2013, and has expanded its reach and service offerings organically and through acquisitions. The company operates in three reportable segments: Infrastructure, Construction-Technology-Science, and Geospatial Solutions.
The Infrastructure segment includes the management of civil programs along with the rest of the engineering programs for private projects, quality assurance procedures in construction as well as testing and inspection practices. It deals with the search and selection of locations, architectural design, issues related to water management and transportation of materials, structural engineering, and laying of electrical networks among others. The testing and inspection section offers geotechnical engineering and forensic consulting services.
The BTS segment includes environmental health sciences sector management, clean energy consulting, and building management. This segment is responsible for the mechanical, electrical, and plumbing design of the facilities. It also offers consulting services for the projection of vertical constructions, acoustic design consulting, and various safety and environmental analyses.
The Geospatial Solutions segment includes a full spectrum of geospatial data analytical capabilities that leverage cutting-edge remote sensing technology and proprietary solutions. More specifically, they include autonomous solutions, subscription software, automated enrichment, proprietary algorithms, and cloud data engagement.
Beneficial Recent Earnings, And Market Reaction
In the last quarterly report, NV5 Global, Inc. reported better EPS than expected and more revenue than expected. EPS GAAP stood at close to $0.86 with quarterly revenue of $239 million. In 2023, after several beneficial earning reports, the stock price seemed to increase from less than $101 to around $109-$121. Given the current valuation of the stock and market estimates delivered by other market analysts, I believe that the market is a bit unfair with NV5.
Source: SA Source: SA
Beneficial Market Expectations
The expectations of other analysts seem beneficial. We are not only talking about net sales growth, but also operating margin growth, net margin growth, and FCF growth from 2023 to 2025.
More in particular, market expectations include 2025 net sales close to $978 million, with 2025 EBITDA of $182 million, 2025 EBIT of $99 million, and operating margin close to 10%. Besides, with 2025 earnings before tax of $92 million, 2025 net income would be close to $70 million, with free cash flow of about $122 million.
Source: S&P
Expansion Into New Markets May Be Easy Given The Expertise Of NV5 And More Selling Expenses
NV5 Global believes that it has competitive advantages in terms of its service organizational structure, experience, contacts developed in a variety of local markets, and long-term relationships with loyal customers.
The industry appears to be shifting from one-off projects to strong relationships with clients in a series of multiple projects. For this reason, it focuses on dedicating both technical service and marketing resources to building relationships with customers. I believe that this new approach could bring new business growth not seen before. In this regard, it is worth noting that NV5 Global, Inc. delivers more SG&A expenses year after year.
Source: YCharts
The Recent Acquisition Of Red May Bring Recurring Net Sales And 13% Organic Growth
Among the successful strategies implemented by NV5, I found the search for promising acquisitions to consolidate or expand positions in its offering service and the parallel approach between continuity in relations with the public sector. In this regard, I would expect significant business growth thanks to the acquisition of Red Technologies. The new target is expected to bring recurring revenue, 13% organic growth, cloud-based data demand in the Asia Pacific region, and further deployment of 5G service.
Source: Investor Presentation
The Geospatial Solutions segment maintains a mergers and acquisitions initiative dedicated to identifying, exploring, and negotiating acquisition opportunities. It looks for acquisitions that expand capabilities, complement existing services, or expand geographically. The segment proposes that the objectives must be profitable and have growth potential. Its approach aims to add value through solid corporate support. This investment strategy includes the acquisition of Quantum Spatial Inc. in 2019, Geodynamics in 2021, and Axim Geospatial, LLC in 2023.
Market experts believe that the Geospatial Solutions market is expected to grow at close to 7%-8%. Under my assumptions, I included net sales growth that is not far from these growth figures.
The latest research study on the global Geospatial Solutions market finds that the global Geospatial Solutions market reached a value of USD 228110.3 million in 2022. It's expected that the market will achieve USD 358976.31 million by 2028, exhibiting a CAGR of 7.85% during the forecast period. Source: Geospatial Solutions Market
If Backlog Momentum Continues, We May See Significant Increase In Accounts Receivables And FCF Growth
I believe that it is worth noting that NV5, in the last four years, reported significant backlog growth. In the last quarter, backlog growth increased at close to 9% q/q, which is more significant than that in the same period in 2022. Given the recent acceleration of backlog growth, I think that momentum could continue in the incoming quarters. As a result, I believe that accounts receivables increase and FCF growth could appear.
Source: Investor Presentation
Significant Number Of Growth Drivers Including International Data Center Expansion As Well As Geospatial And Technology Offerings Growth
In the last quarterly presentation, NV5 highlighted 9 initiatives that could bring significant business growth in the coming years. Among them, I think that international data center expansion, geospatial and technology offerings growth, and supporting the electric grid in 2023 could bring significant net sales growth.
Source: Investor Presentation
In this regard, it is worth noting that the global data center market size is expected to grow at close to 10%-11% from 2023 to 2030. With this in mind, I believe that NV5's future net sales growth will most likely not be far from these figures.
The global data center market size was valued at USD 194.81 billion in 2022 and is projected to grow at a compound annual growth rate of 10.9% from 2023 to 2030. Source: Data Center Market Size
Solid Balance Sheet
NV5 Global gets paid a bit late, so management needs to use some debt in order to finance its working capital. I am not worried about the total amount of debt because of the growing FCF growth, property assets, and goodwill. However, I believe that investors may want to study carefully the interest rate being paid in order to run financial models.
As of September 30, 2023, NV5 reported cash and cash equivalents worth $46 million, with billed receivables of about $166 million, unbilled receivables worth $122 million, and total current assets of about $349 million. The ratio of current assets/current liabilities is larger than 1x, so I am not worried about potential liquidity issues.
The company also reports property and equipment worth $49 million, intangible assets of $236 million, and goodwill worth $527 million. Total assets stood at $1205 million, and the asset/liability ratio is larger than 2x. I believe that the balance sheet remains stable.
Source: 10-Q
In the last quarterly report, accounts payable stood at close to $67 million, with accrued liabilities worth $64 million, current portion of contingent consideration of $3 million, and current portion of notes payable and other obligations close to $12 million.
With other long-term liabilities worth $29 million and notes payable and other obligations of $215 million, total liabilities are equal to $446 million. It is worth noting that notes payable increased significantly in 2023 to finance recent acquisitions.
Source: 10-Q
I studied a bit the debt reported by NV5 Global. The company signed debt agreements having interest rate close to 6.7% and linked to the Eurocurrency rate, LIBOR, and SOFR.
Borrowings under the Second A&R Credit Agreement bear interest at variable rates which are, at the Company's option, tied to a Eurocurrency rate equal to LIBOR or, from and after the LIBOR Transition, either Term SOFR or Daily Simple SOFR, plus in each case an applicable margin or a base rate denominated in U.S. dollars. Interest rates remain subject to change based on the Company's consolidated leverage ratio. As of September 30, 2023, the Company's interest rate was 6.7%. Source: 10-Q
NV5 Global Traded At 30x FCF
NV5 Global, Inc. traded in 2018 at more than 36x FCF, but it is currently trading a bit lower. The EV/10 years Median FCF, EV/7 years FCF, and EV/5 years Median FCF stand at close to 23x-27x. With these figures, I think that assuming exit multiples close to 23x and 27x would make sense.
Source: YCharts
My Cash Flow Expectations Based On Previous Assumptions, Market Estimates, And Previous Cash Flow Statements
My expectations include 2030 net income of about $138 million, 2030 depreciation and amortization of about $38 million, non-cash lease expense worth $25 million, provision for doubtful accounts close to $1 million, and stock-based compensation of about $35 million. I did not include changes in fair value of contingent consideration and gains on disposals of property and equipment because I believe that these are extraordinary events.
Additionally, I also expected deferred income taxes of close to -$6 million, amortization of debt issuance costs of close to -$1 million, billed receivables of close to $89 million, and changes in accounts payable of close to -$28 million.
Also, with contingent consideration of close to -$5 million, billings in excess of costs of -$71 million, and other current liabilities of -$3 million, CFO would be $203 million. Finally, with a capex of -$35 million, I obtained 2030 FCF of $168 million.
Source: Oren's Expectations
With FCF expectations between $78 million and $168 million, a WACC between 6% and 11%, and EV/FCF between 23x and 27x, I obtained a fair valuation between $146 million and $228 million. Additionally, the median valuation would be close to $179 million.
Source: My DCF Model
The results also included an internal rate of return between 3% and 14% and a median IRR close to 9%. Other investment analysts may make different assumptions, and may obtain different conclusions, however I think that most analysts would conclude that NV5 is cheap.
Source: My DCF Model
Large Number Of Competitors
The engineering and engineering consulting industry is highly fragmented, and is characterized by many smaller companies that are focused on local or regional markets. Therefore, the competition is extensive, and depends specifically on the technical area and geographic region considered.
The company competes with a large number of companies such as AECOM ( ACM ), AMEC Foster Wheeler plc, Bureau Veritas SA ( BVRDF ), Burns & McDonnell, Dewberry, the Hill International division of Global Infrastructure Solutions Inc., and Intertek Group plc ( IKTSF ).
Risks
Among the company's key risk factors, we find first of all its exposure to the work and services related to state agencies and its dependence on the federal and state budget in this regard. Furthermore, the degree of competitiveness of the industry is very high, and several of the markets in which it operates in the private sector have a very small client base.
The company also reports a significant amount of accumulated goodwill and intangible assets derived from previous acquisitions. If management overestimated the potential synergies to be obtained from previous acquisitions, we could see goodwill impairments. As a result, NV5 could suffer from book value per share reductions or lower net sales growth expectations, which may lead to stock price declines.
Considering the total amount of debt and accounts receivables accumulated, in my view, if clients decide to pay NV5 a bit later, the total amount of debt may have to increase. As a result, interest expenses could increase, and we may also see a reduction in the EV/FCF ratio. In sum, NV5 could also suffer a decline in the stock price.
Conclusion
With growing backlog, the recent acquisition of Red, and potential new acquisitions in the Geospatial segment, NV5 Global, Inc. could see further net sales in the incoming quarters. I also think that considering the recent increases in selling and marketing expenses as well as the know-how accumulated by NV5, we may see further increase in the number of clients receiving data center services. With that, I saw some risks from failed acquisitions, goodwill impairments, or failed expansion into new areas. However, I believe that NV5 Global, Inc. could be trading a bit more expensively.
For further details see:
NV5 Global: Data Center Expansion, Better Than Expected Earnings, And Cheap