New position: NV5 Global (NVEE)

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NV5 Global (NVEE)

Summary and History

My history with NV5 is only a couple days long. TracyK mentioned she’d bought shares, and when I asked about the company she replied that she heard about it on one of the Motley Fool podcasts. I tracked down the segment: https://www.fool.com/investing/2017/10/24/why-nv5-global-sho…

That’s a pretty good summary of what they do. Fairly compelling story. They’re an engineering and consulting services company in the infrastructure industry. They grow by many small acquisitions, but they increase profitability all the while. The founder/CEO owns 10% of the company and altogether insiders own 35%, I believe. That should align management’s interest with ours pretty well.

The slide deck also provides some very helpful company info: https://seekingalpha.com/article/4123490-nv5-holdings-2017-q…

100 locations worldwide
2,000 employees (1,300 technically licensed)
#13 on Fortune’s fastest growing companies 2017
#54 on ENR’s Top 500 Design Firms
#1 on Zweig’s 2017 Hot Firm list
#1 on BD+C’s Hotel Engineering Firms (https://www.bdcnetwork.com/top-30-hotel-engineering-firms)
Huge TAM – basically, infrastructure improvement is a job that’s never finished

Numbers

Mkt Cap: 580M (ie, very very small)

Trailing PE Ratio (non-GAAP): 25

Revenue is given as “total” and “GAAP” but on their Income Statement they show GAAP. I’ll go with that for now. It’s not far off anyway, with “total” coming in at 242.4M YTD and “GAAP” coming in at 239.1M.


Revenue (in millions)
          Mar     Jun     Sep     Dec
2016:      45      56      60      63
2017:      64      84      91

Revenue Growth
         Mar     Jun      Sep      Dec
2016:    54%     62%      52%      49%
2017:    43%     50%      52%

Now make no mistake, this is due to acquisitions. They say it right on the press release:

Organic revenue growth for the first nine months of 2017 was 4%. Obviously 4% isn’t enough to get this board excited, but the job they’re doing with acquisitions (and hopefully can continue to do) is impressive. It bears out in the EPS numbers:


EPS (non-GAAP)
             Mar      Jun      Sep      Dec
2016:       0.32     0.38     0.41     0.44
2017:       0.39     0.56     0.75

EPS Growth
             Mar      Jun      Sep      Dec
2016:        39%      23%      -7%       7%
2017:        22%      47%      83%

So it seems the acquisitions are accretive to EPS rather quickly. Also, I think it’s possible they could show more operating leverage in addition to the growth, resulting in the much beloved (for good reason) multiplier effect.

Balance Sheet
Unsurprisingly due to acquisitions, the balance sheet isn’t the best I’ve ever seen, but it doesn’t particularly scare me either, especially since they’re consistently profitable.

Outlook

They just raised it. Current guidance is:
2017 Revenue: 340M - 358M
2017 EPS (non-GAAP): 2.30 - 2.46

They even go to the trouble to say this “excludes any acquisitions completed in the remainder of 2017.” Haha

I don’t see Q4 outlook listed, but doing a little math it would be:
Dec Q Revenue: 97.6M - 115.6M
Dec Q EPS (non-GAAP): 0.60 - 0.76

Conclusion

An engineering consulting company in the infrastructure industry is a pretty big divergence for me, but I liked the story enough to take a small position. If nothing else, I’ll learn something.

Bear

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I’m interested enough to dig through some reports, Bear.

Without having studied them at all, my first-glance concern is their fields of expertise, specifically
energy, infrastructure and environmental.

Energy: I need to find out if it’s all gas & oil, or if their projects are mixed with electric utilities.
The whole future of energy is kind of hard to parse out right now IMO.

Infrastructure: True, much of our neglected infrastructure is in bad need of rebuilding. However (and not
to be political, but …) I don’t see any leaders very interested in focusing on rebuilding our aging
infrastructure systems, at least not to the point of actually doing something about it. It seems that any
otherwise-unallocated funds will remain headed for war and war materials. I hope I’m wrong and would love
to be pleasantly surprised.

Environmental: I suspect that the new head of the EPA has the mandate of “Shrink-wrap it pronto” and the
new head of the Interior has already started to take land back from national parks against vigorous
opposition. While not necessarily a template for the future, I think it points to the possibility that
the environment is never going to be a priority for this administration, unless we are discussing
trashing it.

Construction & Real Estate: I don’t foresee any barriers for these unless interest rates should get
out of hand.

Off hand, I don’t see the big opportunity for these 3 fields, but as mentioned, I need to dig a bit.
Thanks for the heads-up.

It’s hard to understand why so many think it’s more profitable to blow up other countries than it is to
keep our own country’s machinery in top form with the newest technology. Even if it turns out to be
more profitable to blow up people and places, it seems like there would be some moral reckoning that
would re-balance the choices. But what do I know?

Dan

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My history with NV5 is one day. I have no position in it, don’t follow it, and it’s a ten-foot
hurdle for me when looking for one-foot hurdles. I have no opinion on it, good or bad. That’s
a long-winded way of saying the comments below are probably worthless to you, but here goes
on the off-chance you find something that might help you.

  1. Quarterly growth will be lumpy. Adjusted EPS is calculated by excluding amortization. Those
    amortization numbers are going to bounce around depending on the size of the purchase. They had
    a much bigger one than normal last April and fairly big one in June. If I were looking at it, I’d
    do a trailing twelve month smoothing to get a better sense.

  2. What first struck me: are they in the consulting business or acquisitions business? Most all the
    growth and the management focus is on acquisitions, not the core business. I’d be thinking about
    sustainability. What’s their market for acquisitions? etc. I’d also look at compensation. The
    CEO’s compensation changed last summer – he got a hefty raise and they removed any upper limit
    on his bonus percentage – but it’s not clear now the details of what his bonus is based on. If
    it’s based on some sort of growth measure, well…

  3. They haven’t been able to self-fund. The are dependent on investment in working capital and
    about 80% of their acquisitions have been funded from borrowing and selling stock. If they are going
    to grow more, they’re going to need more outside funding. So I’d be particularly looking at return
    on investment. By way of analogy, you can grow your savings account by borrowing on your house and
    depositing into savings, but if you’re earning less interest on your savings than you’re paying to
    the bank, it’s just pyramiding while burning dollars.

  4. P/E is a comparable valuation, like valuing a house by looking at homes with similar attributes.
    I’d think about putting together a peer group, and looking more into what role that amortization
    plays.

  5. Goodwill as a percent of total assets is growing. That means the impact of any future write-offs
    is growing. Just something to keep in mind and watch.

Thanks,
Ears

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Bear and Raptor2,

I think that is why I was drawn to this business: something that is not like my other investments. They describe their business as:

NV5 is a provider of engineering and consulting services to public and private sector clients, delivering solutions through five business verticals: Construction Quality Assurance, Infrastructure, Energy, Program Management, and Environmental. With offices nationwide and abroad, NV5 helps clients plan, design, build, test, certify, and operate projects that improve the communities where we live and work.

There are literally hundreds of thousands of engineering companies in the U.S., and I think consolidation will happen in a big way. They have been around since 1949, and management owns 35% of the company.

Let’s compare notes along the way.

TracyK

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Thanks for the feedback Ears! Let me address your points one by one:

Quarterly growth will be lumpy.

I think it’s lumpy due to the acquisitions, but I’m not concerned – it seems to snap back into place quickly, as I mentioned. I think the long term trend up (growing along with revenue…margins holding or expanding and not falling) is what’s important. Because revenue growth has been very steady. You can see that while growth is lumpy, EPS is up a bit every year:

2014: 1.03
2015: 1.41
2016: 1.58
2017: 2.38 expected (A bigger lump of growth – and I think this is the tip of the iceberg, at least in the short term)

are they in the consulting business or acquisitions business?

Both? I mean acquisitions help them grow, but then all those folks have to stay busy doing engineering work! Seems like that’s going well. I don’t see any issue here.

They haven’t been able to self-fund.

They haven’t self-funded acquisitions, but they are still consistently profitable after interest payments, etc. “Burning dollars” is not an accurate characterization at all.

I’d think about putting together a peer group

You do have to look at peers, but if they peers aren’t growing their EPS similarly, sometimes good comparatives are hard to find. NV5 is the only one I’ve seen with such rapid and steady growth from 2014 to present. That’s good! I want them to stand out. That said, many of the others have trailing PE’s in the 20’s, and far lower expected earnings next year.

Goodwill as a percent of total assets is growing.

Goodwill and Intangibles of course grow with acquisitions. I did mention the balance sheet isn’t pristine, and I will continue to watch it, thanks. I also mentioned that I’m not concerned at present. Debt to equity level seems in a good range. Are you concerned by anything you see at present on the BS?

Bear

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Tracy:

“There are literally hundreds of thousands of engineering companies in the U.S., and I think consolidation will happen in a big way.”

Why do you think there will be consolidation in this field? What factors would make a very large engineering firm better than small ones concentrating on their narrow field of expertise?

Don

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Are you concerned by anything you see at present on the BS?

The A/R change jumps out at you but they addressed that (and collections) in the most recent
call.

The CFO says their planning to pay off some debt. I’m guessing he’s talking short-term because
it’s difficult to see them doing a sizeable acquisition (like Bock) without more funding. But I
really haven’t looked closely.

Thanks,
Ears

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A couple quick notes to add on NVEE:

-Obviously backlog will be a very important metric to watch, currently at $275M
-the ebitda margin should continue to improve as they grow because:
they said they “believe in a flat organization”, so

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A couple quick notes to add on NVEE:

-Obviously backlog will be a very important metric to watch, currently at $275M
-the ebitda margin should continue to improve as they grow because:

  1. they said they “believe in a flat organization”, so as they expand they don’t add any overhead to
    run the new business
  2. as they expand they are using more of their own people and less sub contractors
  • target goal of $600m in revenue by 2020
  • NVEE raised 2017 eps guidance every quarter this year

Jimbo

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You’re thinking like the Chinese . . .

It’s hard to understand why so many think it’s more profitable to blow up other countries than it is to keep our own country’s machinery in top form with the newest technology.

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TracyK,
A long time ago (late 60s, early 70s) I knew a guy who was a free-lance engineering project manager. He’s travel around the world and manage a bridge project in one country, maybe a dam project somewhere else and so forth. I knew him from a coffee house where I used to hang out. I was recently out of college and looking for work. I asked him if he knew of a job for me (my degree was in Language, Literature and Philosophy, but I had a lot of math and science credits because I was originally in an EE degree program).

As it turns out, he was managing a project to put the first UHF TV channel on the air in Chicago (my hometown at the time). He said the TV station management (part of SRO) thought they could automate everything and run the station with a few engineers, but he said that wouldn’t be possible. I should just wait a few weeks until they finally conceded that their dream would not be realised and they would need to hire production people. Turned out, I was the first production worker for WSNS channel 44 television in Chicago (at the time it was an all news format, pretty much off the teletype and displayed as print on the screen).

The reason I relate the story is that this guy was completely agnostic about what kind of engineering project he managed. They all had basic similarities and what he needed to know specific to a project or technology he learned on the job (or soon before he engaged the project).

Someone asked if this company’s focus on energy is just oil & gas. I would venture, they don’t much care what the energy source might be, at least when it comes to project management. That wouldn’t be true for project design.

I’ve not read anything about the company other than what’s been written on this board. Just suggesting that specialization only pertains to certain aspect of engineering projects. A lot of it is fairly generic.

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https://seekingalpha.com/article/4122219-nvee-extra-e-expens…

“NV5 paid approximately two times tangible and identifiable intangible book value for its 2016 acquisitions - a premium that was slightly higher than the company’s 2015 acquisitions, which included $12.5 million in net tangible and intangible assets for a total price of $23.0 million. It should be noted that the $77.4 million in assets acquired in 2016 represented almost 36 percent of NV5’s total assets at the end of 2016, so these were major acquisitions that made significant contributions to the company’s revenue and profits. Now here’s where the miracle happens: The market thought so highly of these acquisitions that, in its infinite and infallible wisdom, it awarded NV5 a price-to-book ratio of more than 3 including goodwill. That means the tangible and identifiable intangible assets acquired in 2015 and 2016 as part of NV5’s total assets are currently valued at more than six times their appraised value within the last 21 months.”

“Although one might quibble with the price paid for the acquired companies, one should marvel at the clever way NV5 structures the deals, which often include a combination of cash, seller financing and stock.”

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Don,
That’s a great question. 2017 Engneering and Construction Trends: https://pwc.to/2B3UYNa

“First, the recent downturn has hurt smaller firms (those with less than US$6 billion in revenue) much more than their larger and more diversified peers. Most of these smaller E&C firms have already taken multiple steps to reduce overhead and transform their cost structure, leaving little fat left to cut. And although oil prices appear to have stabilized (for now), many E&C companies will not benefit for several years, until that capital can work its way through energy companies’ planning cycles and show up as planned capital expenditures.”

When I listend to TMF podcast, did some reading - it made sense to make a modest investment into NV5 Global.

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It’s interesting, brittlerock. I learn a lot from numbers, but what sticks with me is stories. Please keep doing both. ~TracyK

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