GVA.. one of the few market gems earnings plays that did not take off after a good earnings report. It probably will now that TheStreet.com reporter has it as well.
Stock Mart: Granite Construction
By Mavis Scanlon
Staff Reporter
The nation's highways are in a sorry state. And over the next few years,
that will keep Granite Construction (GVA:NYSE) very busy.
The Watsonville, Calif.-based company is one of the largest civil
construction contractors in the U.S. So it stands to benefit from a
transportation bill, passed last year, that has greatly increased federal
funding to fix the nation's sagging infrastructure.
Between 1998 and 2003, federal spending on highway construction is expected
to increase 44% over the prior six-year period to $175 billion. Spending on
transit is expected to jump 30% to $42 billion, according to Merrill Lynch.
"When you throw [the transportation bill] into the picture and the amount
of potential business into the mix, it's phenomenal," says Rob Mathai,
chief operating officer of Capital Technology, a Charlotte, N.C.-based
money management firm and Granite shareholder.
Granite generated almost 70% of its $1.2 billion in revenue last year from
public sector infrastructure projects such as highway construction, bridges
and tunnels. Last year it earned $46 million, or $1.72 per share, compared
with $28 million, or $1.03 per share, in 1997.
Thanks to the transportation bill, Granite is expected to bid on about $8
billion in new work this year, more than three times last year's amount,
says analyst Fritz von Carp at Merrill Lynch. Earlier this month, he raised
his rating on the stock to accumulate from neutral to reflect the improving
outlook. Merrill hasn't performed underwriting for Granite.
"I think our prospects have never looked better [based on] the amount of
money being brought to the table by state and local governments," as well
as normal demand, says William Barton, a Granite vice president and chief
financial officer.
Historically, the company has won between 20% and 30% of the projects it
has bid on, Barton says. But profits take some time to roll in after a job
has been won, so projects this year most likely won't translate into
earnings until next year. In addition, Granite's accounting methodology
recognizes profits only after a job is 25% complete.
Yet construction companies tend to trade higher in anticipation of projects
being awarded. Investors got excited about the legislation, known as the
Transportation Equity Act for the 21st Century, when it was passed last
June. Between June and January, Granite's shares ran from near 20 to a
52-week high of 37.
Then, when it became evident that much of the spending would only begin
late this year and in 2000, the stock tumbled. When Granite reported
fourth-quarter earnings of 36 cents, 4 cents short of the Street estimate,
the stock was pummeled, falling to near 20.
HGK Asset Management beefed up its position when shares of Granite were in
the low 20s, and Managing Director Arthur Coia says the stock is still a
compelling value. "I wouldn't shy away from buying it here," he says. His
firm holds about 20,000 Granite shares.
At a trailing price-to-earnings ratio of 14.5, Granite is well below the
sector's 20.28 ratio, according to Market Guide, and less than half the
ratio of the S&P 500's at 37.33. Its price-to-sales ratio is 0.55, well
below the 1.0 ratio that value investors traditionally seek. The stock
closed at 28 5/8, up 1/2 Friday.
Coia thinks Granite could earn as much as $2.50 a share in 2000, but for
now he is using $2.20, still well above the First Call consensus of $2.03.
"The fundamentals of Granite's markets are better than they've been in 30
years," says Merrill's von Carp, "and that is not reflected in the stock
price."
Von Carp expects Granite to win several large jobs in this year's second
half as states ramp spending in conjunction with the federal funds. Typical
are two recent projects Granite won, a $28 million highway project near
Palm Springs, Calif., and a $33 million highway contract near Orlando, Fla.
But other major projects in the works include a $92 million highway
interchange project in Texas and a $500 million light-rail project in Utah
that Granite is working on with Morrison Knudsen (MK:NYSE) and construction
giant Kiewit.
Of course, Granite's projects could be delayed. After all, governments are
bureaucracies. And the weather is a big, unpredictable factor. A third
hurdle the company could face is the potential flattening of its prep work
for residential development in California.
Making a successful move into new markets is another challenge for Granite,
says Marc Sulam, who covers the firm at Donaldson Lufkin & Jenrette. He has
a market-perform rating on the stock; DLJ hasn't performed underwriting for
Granite.
For now, however, the transportation bill promises plenty of work in the
company's current markets.
Article taken from TheStreet.com.. |
