In a recent report from Primoris Services Corporation (NYSE: PRIM), the company’s top line showed clear signs of strength as they managed to increase their backlog significantly, which also translated into Turn existing demand into growth. Revenue for the quarter rose 38% year-over-year to $1.4 billion. This appears to have spurred a jump in Primoris stock, as Primoris has continued to impress over the past 12 months.
I like the valuation of the business, and while there are some risks associated with a high concentration on a small number of customers for growth, I think the upside potential is far outweighed at this point. As the company is gaining momentum from construction and investment, the outlook remains solid as I think we are at the start of another boom in the US.I am bullish Regarding the next few years of PRIM, we will buy it now.
PRIM stands as a pre-eminent professional contractor firm, catering to the needs of different industries with its broad portfolio of services. Established in North America, PRIM excels in providing specialist fabrication, construction, replacement and engineering solutions to meet the unique needs of our customers.
The company’s business is organized into three distinct categories, each covering its areas of expertise and contributions to various industries. The Pipeline Services segment is a key part of PRIM’s service offering. Within this field, the company plays a vital role in the construction, maintenance and overall integrity of pipelines. From facilitating pipeline facility management to ensuring its operational integrity, PRIM brings its expertise to every aspect of this vital infrastructure.
One of the key parts of PRIM right now is watching the business backlog grow strongly. The impressive growth in the last quarter is the main reason for the sharp appreciation in the share price over the past 12 months. Each quarter alone, backlogs increased by 19%. The main growth drivers behind this are solar, heavy civil and industrial projects won by PRIM in the second quarter of this year. Seeing such strength makes me more optimistic about the company’s prospects, because it really tells the story of the market position the company has and the reliability of people’s confidence in their continued acquisition of projects and contracts.
Another big bright spot for the company is the growth in profit margins. Product costs are growing as fast as revenue is growing, which of course leads to increased margins in the business. This tells me that demand is increasing and that PRIM can take advantage of this and increase prices without affecting backlog growth. It also helps offset some of the higher interest expense the company has been forced to pay due to rising interest rates in the country.
Looking to the rest of 2023, I think the guidance remains very promising as EPS will be in the range of $2.15 to $2.35, a slight increase from previous estimates. From a gross margin point of view, albeit no higher expectations than what was provided last quarter. The tax rate in the energy sector is 10-12%, and the tax rate in the utility sector is 9-11%. Pretty much in line with what was shown in the previous quarter.
The company’s revenue dynamics are closely tied to the outcome of a variety of projects, from major construction projects to smaller projects funded through management service agreements. The company’s financial performance depends on the successful execution of these efforts, reflecting the wide range of projects it undertakes.
In the field of large construction projects, the company’s revenue is directly related to the successful completion and outcome of these projects. These larger projects contribute a significant portion of the company’s revenue and are a key driver of its financial health. It is worth noting, however, that the completion of a major construction project does not necessarily mean a permanent loss of the client. Instead, a company’s ongoing relationship with its customers is likely to persist, albeit with varying effects on future revenue generation.
The composition of their customer base is notable, with the top 10 customers playing a significant role in shaping their revenue landscape. In 2022, these top customers collectively contributed about 46.1% of its total revenue. This concentration highlights the reliance of a large part of the company’s financial performance on a relatively small customer base. I think that might put some pressure on the company as they aim to get more and more contracts and customers when construction investment is ramping up again.In the medium term, I think we are facing another construction and manufacturing boom in the US, and PRIM is very well positioned to capitalize on that, even if they are highly concentrated in a few single clients
Prices for PRIMs have been rising steadily over the past few months, but have not yet reached the point where I would consider them grossly overvalued. At a roughly 40-50% earnings discount, I think PRIM is grossly overvalued. Currently, the P/E ratio is 12% or 26% below the industry. Looking at the valuation again, we can see that the P/E ratio is very low at just 0.33. Compared to the actual growth of the business, I think PRIM is a good deal right now based on these metrics. I think the company’s business in the construction and engineering industry has benefited greatly from direct investment in the sector as the sector rebounds. The market appears to be on the verge of another strong open boom, and I think PRIM is a great way to benefit from it. With the dividend increasing and buybacks likely to keep up, higher demand and backlog should translate into better earnings, which should ultimately result in solid shareholder value. Since the company also trades at a nearly 30% discount to the industry’s earnings, I think this further solidifies its current Buy position.