Investment Thesis
Powell Industries, Inc. (NASDAQ:POWL) specializes in the design and manufacturing of power control rooms for industries like petrochemicals, oil and gas, utilities, and commercial sectors. Their focus is on delivering integrated solutions for large-scale projects.
Powell Industries delivered a very strong fiscal Q1 2024 result, and its outlook for the remainder of fiscal 2024 looks equally compelling.
According to my estimates, this debt-free company, with approximately 19% of its market cap made up of cash, is priced at 9x forward free cash flows.
Why Powell Industries? Why Now?
Powell operates in the electrical automation and control industry. They design and manufacture power control rooms for various sectors such as petrochemical, oil and gas, utilities, and commercial industries. Powell’s focus is on delivering efficient and integrated solutions for large-scale projects. They also invest in expanding their facilities to support fabrication and integration needs, while maintaining a diverse portfolio too.
Moving on, Powell’s near-term prospects appear promising, marked by a robust start to fiscal year 2024. The company demonstrated a strong first quarter, with $198 million in new orders, a 15% sequential increase, and a commendable 53% growth in revenue compared to the prior year (more details on its financials to come).
The diverse range of sectors contributing to this growth, including petrochemical, oil and gas, utility, and commercial, showcases the company’s resilience and adaptability. The strategic investments in expanding facilities, such as the completed expansion of the Houston facility and the planned expansion of the electrical products factory, underline Powell’s dedication to enhancing fabrication capabilities.
Moreover, the healthy backlog of $1.3 billion together with its focus on growth across multiple business segments position Powell favorably.
However, Powell faces near-term challenges given the U.S. administration’s move to freeze new LNG projects, which will deliver delays in project schedules. For now, it is unclear how significant the impact will be.
Additionally, the ongoing global developments related to energy transition projects, including hydrogen, biofuels, and carbon capture, present both opportunities and challenges. While these projects are expected to contribute significantly to Powell’s financial results in fiscal 2024 and 2025, how the cards ultimately play out remains to be seen.
Given this background, let’s now discuss its fundamentals.
2024 CAGR Could Reach 25% CAGR
It’s difficult to get a firm view of Powell’s growth rates, particularly given that Powell Industries itself doesn’t provide much in terms of forward guidance. Nevertheless, given the impressively strong Q1 result, one could make the case that Powell could end up growing this year by approximately 25% CAGR on the top line.
That being said, we must keep in mind that fiscal Q1 was up against the easiest quarter for some time. Indeed, this is true, meaning that in the next few quarters, Powell Industries will be up against much tougher comparables.
On the other hand, I remain of the opinion that Powell could still grow by approximately 25% CAGR its revenues, since the first quarter of this year already delivered 53% y/y revenue growth rates.
Next, we’ll turn to discuss POWL’s valuation.
POWL Stock Valuation — 9x Free Cash Flow
Given POWL’s guidance of a very strong gross profit margin expansion of 950 basis points compared with Q1 of the prior year, one could infer that there’s scope for POWL to reach 25% gross profit margins in this fiscal year.
This would be approximately 400 basis point expansion from fiscal 2023.
Therefore, generally speaking, any business that is on a path toward expanding its gross margins by 400 basis points in 12 months can be given ample space for its multiple to expand.
As it stands right now, I estimate that in fiscal 2024, POWL’s free cash flows could reach $200 million.
This means that POWL is priced at about 9x forward free cash flow. This is a figure that I believe to be remarkably cheap, particularly when we consider that this business has no debt and carries approximately $355 million of cash and equivalents, which equates to about 19% of its market cap simply being made up of cash.
The Bottom Line
In wrapping up, Powell Industries appears to be an enticing investment opportunity in the electrical automation and control industry.
With no debt and a substantial cash reserve, I see Powell as well positioned to benefit from its diverse portfolio and market resilience.
The company’s recent fiscal Q1 2024 results show a strong start, boasting a 53%y/y revenue growth and a substantial backlog of $1.3 billion.
While near-term challenges, such as the U.S. administration’s freeze on LNG projects, bring uncertainties, Powell’s proactive approach to expanding facilities and adapting to market dynamics reflects its commitment to sustained growth.
With my estimation of a 25% CAGR in revenues and priced at a conservative 9x forward free cash flow, Powell Industries emerges as an undervalued stock worth considering.