"President Bruce Cowen". lol->Michael E. Shonstrom of Shonstrom Research Associates, who rates TRC a buy, notes that the stock is close to his $58 price target. "I still think it's early in the story, and we'd like to see it develop more" before putting a more aggressive price target on the stock, Shonstrom said.
Dow Jones Interview with TRC
No End Seen To TRC's Cinderella Story
By Christopher C. Williams
Of Dow Jones Newswires
NEW YORK (Dow Jones)--When Richard Ellison took over the reins of TRC Cos. (TRR) in 1997, the stock was near its lows, business was on the decline and top corporate officials were embroiled in a stock option fraud case.
Add to that mix the fact that Ellison had never run a public company before.
Sounds like a recipe for disaster? It's been anything but, as Ellison has turned the environmental engineering and consulting company into a Wall Street darling. The company has strung together 15 straight quarters of improved earnings and revenue. Shares of TRC have been on a two-year tear, surging 440% over the last 12 months and an incredible 980% over the past two years.
Tuesday, the stock hit a 52-week high of $55.20, surpassing the previous high of $54.30 set Monday.
The ride should continue for a while. Amid mounting speculation, TRC is thinking of splitting the stock, which, if nothing else, would bring more attention to the stock and make it easier to buy. Furthermore, a bulging backlog promises steady stream of business and possible upside earnings surprises and investors' love affair with energy-related stocks should continue to juice TRC shares.
"We are evaluating a stock split," Ellison told Dow Jones Newswires. "The board has asked me to get some advice on it and when we should do it." He said management could make a decision by August. Michael Salmon, senior vice president, said the company doesn't know what kind of split it might establish, adding that the board hasn't discussed it yet.
But any split would increase the public float from a relatively paltry 5 million shares, out of 8.1 million fully diluted shares outstanding. TRC has a market capitalization of $412 million and trades an average 124,500 shares a day. Management and the board own 15% to 20% of the shares, Salmon said.
Analyst Ted Wolff, of U.S. Securities & Futures Corp., expects the stock to trade a bit higher before a split. "I'd like to see a split stock comfortably above $20," he said.
Ellison has led the Cinderella-like turnaround for TRC through cutting the company's dependence on regulatory-driven business and refocusing on the energy market, helping to site and permit power plants and launching a unique business to clean up contaminated sites.
But TRC's meteoritic rise has some investors and analysts concerned the stock may be going too far too fast. Analyst William A. Block, of W.A.B. Capital in Santa Monica, Calif., thought TRC was ahead of itself at $32 and, though he continues to believe that the company's fundamentals are very strong, he isn't recommending investors buy more shares. But he's not selling either. "Those who come in, there's no reason to get out," Block said. "We continue to go along for the ride."
Michael E. Shonstrom of Shonstrom Research Associates, who rates TRC a buy, notes that the stock is close to his $58 price target. "I still think it's early in the story, and we'd like to see it develop more" before putting a more aggressive price target on the stock, Shonstrom said.
Stock Seen With Room To Grow
TRC is selling at about 34 times fiscal 2002 earnings estimate of $1.60 a share, based on Monday's close. That's higher than the 22 P/E ratio for Tetra Tech Inc. (TTEK), the high-flying management consulting company to which TRC is sometimes compared. (Coincidentally, Tetra Tech has split its stock over the years.) But TRC's P/E ratio is lower than its expected earnings growth rate of 52% for 2002. Gross revenue is expected to jump 33% to $238 million next year from $178.8 million this year, according to Shonstrom. TRC sees long-term revenue gains of 25% to 30%, said Salmon.
As a mid-capitalization growth firm, TRC's multiple is justified, argued Ellison. "Our backlog is large and predictability going forward is greater than ever."
Shonstrom agrees. "It's full," said the analyst, referring to valuation. "But if it continues to extract the growth rate it has and continues to come in above Street's estimates, there could be upside potential on the multiple."
Wolff of U.S. Securities believes TRC could reach $75 to $100 within two years. "The stock might be a little ahead of itself currently," propelled by momentum investing, said Wolff. But "what makes a horse go is growth of earnings, good, honest earnings, no accounting gimmicks. And these guys have it."
TRC Outrunning Its Checkered Past
With every leap of its stock price, TRC is outrunning its checkered past. Weak market demand and strong competition caused a sales slump in 1996 and 1997. In 1997, Chairman and Chief Executive Vincent Rocco and President Bruce Cowen resigned after being investigated for improperly exercising stock options.
Ellison was serving as the head of TRC Environmental Solutions subsidiary when the board asked him to assume the CEO and president posts. Ellison had never run a public company, but he tapped into his experience of building two successful companies to turn around TRC, bringing the company to profitability within four months after taking over. TRC reported a loss for all of fiscal 1997 but a profit the following year.
"To a large extent it's a totally different company other than the name," said Ellison. In the early 1990s, TRC helped companies comply with government regulations. "Today more than 50% of our business deals with economically driven needs of customers," the official said.
Teaming up with mega insurance company American International Group (AIG), Ellison launched TRC's Exit Strategy program in 1996, under which TRC, unlike other environmental-services firms, takes full responsibility, including liability risks, for a contaminated site's closure and cleanup for a fixed fee. Companies are willing to pay more for this one-stop service.
Consolidated Edison Inc. (ED) did, hiring TRC in November to clean up a 9.2-acre property near the East River in New York City. Con Ed was able to sell the land to developers for up to $680 million. The $103.5 million multiyear contract is the biggest TRC has ever signed. TRC expects Exit Strategy to generate more than $30 million in gross revenue in fiscal 2002, doubling the $15 million expected this year, noted Salmon.
TRC is also targeting the industrial power production industry. TRC works both the supply and demand side, permitting sites and natural gas pipelines and providing energy efficiency services to customers.
TRC has a more conventional environmental services and infrastructure businesses. But the rapidly growing Exit Strategy and energy businesses, which make up 35% of total revenue, are providing most of the pizzazz to the TRC story. Exit Strategy should grow 50% a year and energy operations should substantially more than the 10% expected for the core business, according to Salmon. TRC estimates Exit Strategy business alone could be a $120 billion market over 10 years.
TRC is shaking off any effect from the slowing U.S. economy. "Every part of our business has backlog that's equal to or higher than a year ago," Ellison said.
Since 1999, TRC has also been riding an aggressive acquisition program, completing eight acquisitions. TRC plans to buy five more companies this year.
But with that strategy, TRC faces acquisition-related risks, said some observers. "The question isn't can they grow but how well they manage the expansion and the business and take advantage of the backlog," said Shonstrom.
Another question mark is the duration of TRC's partnership agreement with AIG Environmental, which is critical to TRC's Exit Strategy. Ellison sees little chance of losing its business with AIG, citing TRC's "extremely good relationship" with all levels of AIG management. In addition, he added, AIG isn't TRC's only option. "There are other insurance companies that provide the service," he said. Officials of AIG weren't available for comment.
Ellison noted that TRC has regained Wall Street's favor by meeting its earnings goals. Management met its objective of 60 cents to 70 cents a share last year and is looking for $1.05 to $1.10 this year and $1.50 to $1.70 for 2002, Salmon said. TRC reported 65 cents last fiscal year on $117 million in gross revenue. "With increased backlog, the likelihood of these projections being met has increased," Ellison said.
By Christopher C. Williams, Dow Jones Newswires
201-938-5219; christopher.williams@dowjones.com
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