Tutor Perini Corp (NYSE:TPC) is one of the largest general contractors in the United States. The company offer general contracting, construction management and design-build services to governments and private enterprises worldwide. Currently, the company has a market capitalization of just over $1 billion and an average daily volume of 223,000. During 2012 the company’s revenues were $4.1 billion.
Does Tutor Perini deserve this low valuation?
The question is, does Tutor Perini Corp (NYSE:TPC) deserve this low valuation? Trading at a price-to-sales ratio of 0.25, the company is valued lower than most of its peers within the heavy construction sector. Indeed, peers Granite Construction and Fluor trade at price-to-sales ratios of 0.4 and 0.5 respectively.
That said, Tutor Perini Corp (NYSE:TPC) recently reported a poor set of fiscal third quarter results, which reported that revenues had fallen 6% and earnings per share had fallen 9%. Still, the company reaffirmed full-year guidance for revenue to be in the range of $4.5 billion to $5 billion, which even at the low end would be year-on-year revenue growth of just under 10%, impressive for a construction company considering the current macroeconomic environment.
Tutor Perini deserves a premium
What’s more, the company also reported within its fiscal third quarter results that its order backlog had now reached $6.9 billion, locking in around six quarters of revenue and standing at the highest level since the third quarter of 2008. This implies that far from deserving a low valuation, Tutor Perini Corp (NYSE:TPC) deserves a premium, as the company’s order backlog has been expanding rapidly and revenue continues to expand in the high-single, low-double digit range.
As well as its low valuation in relation to sales and peers, one of the original reasons that I was attracted to Tutor Perini Corp (NYSE:TPC) was the company’s low price-to-book valuation. In particular, total stockholders equity amounted to $1.2 billion at the end of the fiscal third quarter, which gives an indicative book value per share of $25.10, 14% away from current levels.
Having said that, Tutor Perini Corp (NYSE:TPC) has historically traded at a discount to its book value per share. The only time the company has traded at a premium to book value for a sustained period was during the market bubble of 2007/2008. So, on that basis I would not invest purely on the discount to book.
That said, Tutor Perini Corp (NYSE:TPC) is now a much better business than it was back in 2008. The company’s gross margin has doubled during the past five years and the company’s net and operating margin has followed suit.
Tutor Perini could be an interesting play
Still, despite numerous positive reasons to invest in Tutor Perini Corp (NYSE:TPC), the company is still struggling to achieve any kind of bottom line growth. This is somewhat surprising considering the company’s double-digit revenue growth and margin improvements. Nonetheless, it would appear that the reason for this nonexistent bottom line growth is the company’s rising level of borrowing, which has driven interest costs up more than 300% during the past three years. Indeed, since the end of 2010, interest costs have shot from around 5% of EBITDA to 22%, a noticeable difference. Over the same period the company’s gearing has gone from 30% to 64%.
All in all then, Tutor Perini Corp (NYSE:TPC) could be an interesting play but debt is holding back growth.