ENGlobal Corp (ENG) – Stock To Watch If Oil Prices Stabilize by GEO Investing

We currently have 10 stocks in our infrastructure screen.  These companies are benefiting from the billions of dollars being spent on upgrading the aging US infrastructure across various areas. The average return on the only three core positions we established from the screen so far now totals 46%. In previous emails we have talked about starting to build a core position in PPSI as well. We are now adding ENG to this list because of its involvement in the energy infrastructure industry.

ENG is a provider of engineering and automation services primarily to the energy sector throughout the United States and internationally. ENGlobal operates through two business segments: Automation and Engineering. ENGlobal’s Automation segment provides services related to the design, fabrication and implementation of distributed control, instrumentation and process analytical systems. The Engineering segment provides consulting services for the development, management and execution of projects requiring professional engineering, construction management, and related support services (62% of revenue).

Reasons for Tracking (RFT) serves as a great tool for busy investors to maybe start their own due diligence (DD). We also find it useful as a way to bring ideas to our members, as opposed to waiting for us to potentially write a longer article. As a member, you will be kept abreast of how our DD is progressing and if we plan to buy or remove the stock from our RFT watch list.

Please note that I think it may be too early to get excited. I have not and may not buy any ENG. The oil-focused energy infrastructure “theme” is currently the black sheep of the infrastructure investment play because oil companies are spending less capital on projects now that oil prices have fallen well off their highs. The company’s sales and stock price have declined sharply along the with the tailspin in oil prices. But at some point when oil stabilizes and moves higher we think ENG could attract investors if it can resume revenue growth in its newer leaner operating structure.

ENGlobal

ENGlobal

I plan to interview management later this week to get a timeline of how close the company is to entering a new period of sales and earnings per share (EPS) growth.  A positive interview could lead to a change in my decision to hold off on buying shares.

For now, I will list our Reasons for Tracking ENGlobal.  “Reasons For Tracking”, or RFT is one of the services we provide for our subscribers. It’s is a quick glimpse (elevator pitch) of why we have put a stock on our active watch list for a potential inclusion into our portfolio(s).  It serves as a great tool for busy investors to maybe start their own due diligence (DD). We also find it useful as a way to bring ideas to our members, as opposed to waiting for us to potentially write a longer article.  As a member, you will be kept abreast of how our DD is progressing and if we plan to buy or remove the stock from our RFT watch list.

Reasons for tracking ENG:

  • In 2012, the company embarked on restructuring initiatives to dispose of unprofitable divisions aimed at reducing debt and improving margins. As you can see these moves have returned the company to profitability.  The decrease in sales in 2013 to 2014 is the result of selling off divisions.  The decrease in sales in 2015 is the result of less business coming from its oil related business.

ENGlobal

  • The company has approved a stock buyback plan and has started purchasing shares under the plan. We like that management is using cash and not debt to buy back stock.

“In April 2015, the Company`s Board of Directors authorized the repurchase of up to $2 million of the Company`s common stock from time to time, based on prevailing market conditions.  Through February 23, 2016, ENGlobal had repurchased 250,000 shares of common stock for $232 thousand under this program.  As of February 23, 2016, the remaining amount authorized for repurchase under this program was $1.8 million.”

  • With a cash balance of $7.8 million and working capital position of $25.6 million we see little risk that the company will raise capital unless they make an accretive acquisition.
  • Growth prospects could get a boost if the company makes an acquisition. With ample cash and no balance on its credit facility we think the company is in a good position to swoop in and buy some companies at depressed valuations
  • Activist involvement. NGP Energy Capital Management owns 8.3% of ENG’s outstanding shares. Interestingly, NGP Energy Technology Partners, a subsidiary of NGP Energy Capital Management, is an activist investor in GeoBargain GVP. So far we are impressed on how NGP Energy Capital Management has helped GVP turn around its operations since they got involved. We think NGP Energy Capital Management could become active in making sure management makes the right moves to grow the company.

Caveats:

  • It looks like growth may not be in the cards until later in 2016.

“Thus far this year we have gotten off to a slow start utilizing our resources; however, awards of new business have been extremely strong.”

  • If oil prices resume their decline, shares of ENG will probably follow suit.
  • Although shares are not trading at super low valuation levels there could be upside or limited downside in shares as industry conditions improve, especially given that the company is debt free: Here are some valuation ratios:
    • Trailing P/E 19.7: A trailing P/E of 25 is not an unreasonable assumption during a less stressed industry scenario, which would translate into price of $1.41.
    • EV/EBTIDA 6.6: We believe a 10 multiple is a decent EBITDA goal, which will translate into target price of $1.55.
    • EV/S 0.3: We believe EV/S of 1 is a fair valuation multiple for the company which will translate into target price of $3.12.

In my next email to you I will discuss the dangers of getting too caught up in hot trends, like the infrastructure theme, and how to successfully navigate through them.

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Sincerely,
Maj, Dan and the GeoTeam