Powell is a company founded in 1947 which produces electrical components for industrial projects such as substations, electrical houses, circuit breakers, and communication systems. They are involved in the full life cycle of these projects from development, manufacturing, and service.
POWL reported earnings on July 31, and the stock was up between 30-40% on the day, but the price has drifted down since then. The company reported 288M of revenue which was up 50% yoy and up 13% qoq. The catalyst for this type of growth is more work with data centers, and strong performance in existing sectors such as Oil & Gas, and Petrochemical.
Here is snapshot of the companies financials for the last six quarters,
Revenue and yoy growth
171M → 192M → 209M → 194M → 255M → 288M
34% → 42% → 28% → 53% → 49% → 50%
EBITDA
12M → 24M → 32M → 28M → 41M → 59M
Net income
9M → 19M → 26M → 24M → 34M → 46M
Gross margin
20% → 22% → 25% → 25% → 25% → 28%
What I am impressed with here is that the revenue was in the ~200M range about a year ago but came in at 255M and 288M the last two quarters.
Additionally, EBITDA, net income and gross margin are all going up and trending in the right direction. The company is a 2B market cap, 2300 employees, and has a 14.3x P/E. They are investing and innovating in R&D with adding new products.
The CEO Brett Cope has been in the role eight years and worked his way up through the company coming from sales and marketing. The CFO Michael Metcalf has been in the role for six years. Headquarters is in Houston, Texas.
Reviewing the earnings call on July 31, 2024 here were some highlights,
- Strength across nearly all of the market sections served
- Oil & Gas grew 56% yoy, Petrochemical grew 158% yoy
- 356M of new orders in the quarter, up 51% sequentially, but down 30% yoy (They booked two “mega” natural gas projects a year ago for a tough comp)
- Significant increase drive by Electric Utility sector
- Awarded notable petrochemical order for greenfield project in North America
- Gross profit in the quarter “nearly doubled” yoy with gross margin of 28.4%
- “Encouraging dynamic we are observing is the improvement in gross margins across the whole of the business, including many of our non-industrial markets”
- Economics of these nonindustrial markets are improving
- Backlog remains unchanged sequentially, at 1.3B which is the highest in Powell’s history
- Adj EPS of 3.79 (Analysts had forecast only 2.16), versus 1.52 year ago
- Acquired nine acres near Houston HQ for 5.5M to increase building capacity
- R&D spend is up 49%, advancing innovation initiatives to develop new technologies and broaden the product portfolio
- Market sector of Utility up 77% yoy, Commercial and Other up 63%
- Domestic revenue as 244M up 59%
- International revenue up 14% yoy, with projects in UK and Canada
- Company is continuing to benefit from the revenues exiting the backlog of on the large petrochemical order booked in fiscal 2023
- Gross profit for the quarter was 82M vs 43M year ago
- Gross margin up 380 bps yoy
- SG&A as percentage of revenue decreased 260 bps to 7.6%
- 13.8M of operating cash flow
- 374M of cash on balance sheet, was 279M year ago
- Analyst was curious how revenue was up so much as the company seems to be at max capacity, CEO said the company is coming up “against limits”, but Q3 had healthy closeouts and hit the top side (This is a concern of mine that the quarter could be timing related to the upside on projects)
- Analyst asked it sounds like utility market is going better than 6 months ago, CEO said “you’re absolutely spot on”
- Stronger in utility now, Powell brought back into the mix on many of these discussions, “excited by resurgence”
- Analyst, “it’s hard to ignore how quickly cash is building”
- Analyst notes that CEO’s commentary discussed how win rates are improving
- A lot of the infrastructure in the US, Canada, and UK has come up for renewal, and they are looking for strong reliability which Powell provides
- What’s working really well is that “fewer and fewer engineering firms that were competing. The price point really changed.”
- “We’re winning through different channels as well”
Reviewing the prior earnings on May 1, 2024,
- Continued strength and healthy levels of project activity for core industrial end markets
- New orders of 235M, no mega projects booked
- Revenue 255M, up 49%
- Oil & Gas grew 66% yoy, Petrochemical 93% yoy
- Seeing strong project execution and operational efficiences
- Gross profit 24.6% of revenue or 510 bps improved yoy
- Benefitting from quality of backlog, and more favorable margin profile
- Powell’s focus on custom engineered to order solutions for complex projects means that they rarely aspire to win projects on price
- Net income of 33.5M of 2.75 per share
- Backlog at 1.3B and record
- Expansion at Houston facility is complete, incremental fabrication and integration support for large power control rooms, especially for projects that support delivery and transport by water access
- Backlog has tripled in last two years
- Used to primarily serve the outside connection to the data center with the grid, but have potential for further penetration within the four walls of the data center
- Power solutions by data centers are also growing in sophistication and require companies like Powell to build fully integrated solutions
- Building relationships with hyper-scalers to better understand the demands of these facilities
- Outlook on our Utility market is among the most positive in recent years
- Increasing power demands from data centers mean power generation across the US must grow
- 17M operating cash flow
- Analyst surprised at top line of revenue growth, because thought they were running at capacity (my biggest concern too if they can continue to scale)
- Resurgence potential in Middle East, and some work in Africa which is “pretty interesting”, brownfield work in Africa (assuming this means rebuilding old facilities)
- Not optimized to compete yet inside the data center, and there were strong multinational competitors, however, last 3-4 years having conversations about what designs customers want so they can compete
I’ve started a 2.2% position in POWL and continuing to learn more. This is a low confidence position for me as I am still wondering if the growth can continue like they have shown the last two quarters. The CEO sounds humble, and they are looking to innovate and get more wins in the data center. Other sectors seem to be booming too.
With this being a 2B market cap company and P/E of 14.3x I could see this company potentially reaching a 6-10B market cap over the coming years if the business does well. Powell sounds like they are building important relationships with hyper-scalers which could drive growth for years if they nurture those relationships properly.