ENGlobal reported cumulative net income of $0.51 per diluted share, compared to $0.40per diluted share for the same period in 2007 and increase of over 25%.
Revenue met Englobal’s preliminary report target totaling $123.2 million, an increase of approximately $26.4 million, or 27.3%, compared to the third quarter of 2007.
The Company estimates its current backlog is approximately 15% higher than the $298 million reported for the fiscal year ended December 31, 2007.
ENGlobal benefited from a decrease in selling, general and administrative ("SG&A") expenses during the third quarter. As a percentage of revenue, SG&A decreased to 6.0% for the three months ended September 30, 2008 from 8.9% for the comparable period in 2007. Total SG&A expense decreased $1.2 million, or 14.0%, to $7.4 million for the three months ended September 30, 2008, from $8.6 million for the comparable prior-year period. SG&A is in line with the Company's targeted baseline of $7.5 million per quarter and $30 million for the year ended December 31, 2008.
ENGlobal averaged 241,000 billable hours per two-week period during the third quarter 2008, a 20% increase, when compared to 201,000 billable hours in the same period in 2007. The third quarter 2008 average represents a 2% increase over 237,000 billable hours in the second quarter 2008.
The Company’s overall utilization percentage, inclusive of overhead personnel, is approximately 92% for the third quarter 2008 compared to 91% for the comparable period of 2007.
100% of quarter-over-quarter revenue increase attributable to organic or non-acquisition growth.
ENGlobal’s Chairman and Chief Executive Officer, William A. Coskey, P.E., said, “While the third quarter financial results were impacted due to the storms, they were also impacted by an increase in employee benefit costs and operational issues in our Automation and Construction segments. All of these issues resulted in a reduction of approximately 10 to 12 cents in earnings per share during the quarter. The Company has already begun implementing a plan to make improvements in these areas.”
This statement is key to calculate continuing operations. A 10 to 12 cent reduction in EPS due to special items indicate by adding this to the reported upside earnings of .13 yields a continuing operations EPS of .23 to .25 cents in Q3 2008. This represents an increase of 65 – 79% in continuing operations compared to Q3 2007.
http://biz.yahoo.com/bw/081106/20081106005689.html?.v=1
06 November 2008
01 November 2008
ENGlobal 3Q and 4Q, Comments and Views
A correction has been made to 3Q estimates since my earlier observations and remarks (below, further analysis beyond block section). The new numbers are:
Earnings Est. Curr. Qtr
Avg. Estimate 0.17
# of Analysts 5
Low Estimate 0.11
High Estimate 0.13 (changed 11/4 from 0.27)
Year Ago EPS 0.14
"Has anyone noticed the one high and out of place EPS estimate in 3Q? It appears some analyst is tainting the well and setting ENG up to “miss” again in the media. Everyone knows ENGlobal very clearly stated that the estimated EPS for Q3 is .11-.13. Most analysts logically adjusted their expectations, except for one apparently. Notice this one analyst is leaving an unchanged high expectation of .27 cents for Q3.
This is from Yahoo’s ENG Analyst Estimates.
http://finance.yahoo.com/q/ae?s=ENG
Earnings Est. Curr. Qtr
Avg. Estimate 0.17
# of Analysts 5
Low Estimate 0.11
High Estimate 0.27 (this has been unchanged
for some time)
Year Ago EPS 0.14
What doesn’t this analyst understand about the preliminary press release announcement? Analysts usually dig for facts but 3Q expectations were served up on a plate.
My suspicion is this is Sidoti and Company. Last year Sidoti raised their estimate on ENG just days before 3Q 2007 was announced and created a “miss”. Reuters and In Play touted this “miss” when it was actually a stellar quarter. EPS was actually on target as undiluted EPS despite the sudden and questionable upped expectation. BTW, the change was from a correct number to a wrong one. It was as if the media was waiting in a planned situation. For 1Q 07 Sidoti missed their estimate by .10 cents, and by significant amounts in other quarters. Other analysts have generally been more accurate. Sidoti started covering ENG just after Gendell and the Tontine Hedge Fund bought into ENGlobal.
It seems very unreasonable for anyone to keep a high estimate after and in spite of an interim guidance update. I would guess they want to skew the mean, intentionally
create a miss and create negative headlines. There is simply no justification for that high of estimate. So beware and see through it. "
In the upcoming 3Q press release and CC look for information and calculations that investors can see what continuing operations would yield without special events and charges. Continuing operations is a better measure of a company’s health. I have noticed through the years that the CFO, Bob Raiford likes to keep the slate clean. I expect that any reversals that could be taken have been taken in 3Q leaving 4Q clean for maximum profit.
This year has been a stellar year for ENGlobal earning .39 cents in the first two quarters and is currently estimated to earn .58 - .61 cents for the year! This is a 30 - 35% increase over 2007. Some websites indicate higher 2008 earnings from .65 - .69. If you use mean guidance of .12 for 3Q this gives you .51, and 4Q should yield .18 - .22*. This puts ENGlobal into a range of .69 - .73 for 2008. These numbers would recalculate 2008 EPS increasing 54 - 62% over 2007. For revenue ENGlobal has earned 234.2M so far this year. If you add the 123.2M revenue expected from the 3Q preliminary release you get 357.4M – the first 3 quarters 2008 alone almost equals the entire 2007 total - 363M. The revenue estimate for 4Q is 121.13M. *Considering the extra work from hurricane damages and overtime probabilities I think the 4Q revenue and EPS estimates are light and ENG will beat on EPS and Revs. Using the conservative current 4Q revenue estimate brings the total estimated 2008 revenue to 478.53M. This represents about a 32% increase in revenue YOY. When you weight all this in the current economy this is excellent performance.
The Future
The CEO’s open letter to had a great effect in providing confidence and offsetting some general economic fear. He provided some key points:
- ENGlobal provides services that are a core source of revenue and still in high demand.
- Many ENGlobal projects are not economically motivated, but instead are required to comply with various government mandates and regulations. The government will continue to add to these as standards are constantly raised.
- The Automation Group's work is driven by the need to replace aging and obsolete distributed control system (DCS) and analytical equipment. You can’t stop time and this need.
- Three of ENGlobal’s larger clients have publicly expressed that their spending plans for 2009 are basically unchanged from 2008. The CEO expects that this same "very little has changed" attitude will be heard from many of our other large midstream and downstream clients over the near term.
- The US energy independence a national top priority. ENGlobal anticipates progress in this area will create business for them. About half of the states in the U.S. have enacted Renewable Portfolio Standards, which mandate a timeline and percentage for electricity generation from renewable sources such as wind, solar, geothermal, and biomass. Also, the Investment Tax Credit for these renewable energy projects was due to expire on December 31, 2008, but was extended as part of the recent "bailout" legislation. The CEO believes these two factors, working together, will serve to drive demand for alternative energy projects in the future. (ENGlobal is already involved in alternate energy and natural gas.)
- Facilities in the energy industry, as well as in many other industries, are aging. No grass roots refinery has been built in the U.S. since 1976, and many of the country's large pipelines were installed over 50 years ago. Maintaining and rebuilding this aging infrastructure - an ENGlobal core competency - is going to be a future necessity that will benefit our Company.
Mr. Coskey concludes, ”As a result of these and other factors, ENGlobal has had recent success in continuing to land new work, in spite of the economic conditions you read about in the news. We firmly believe our Company is well positioned to ride-out any storms. We expect continued success going forward, including a record level of performance and financial results from operations during the current year and a strong potential for 2009.”
ENGlobal stock has been pushed down by the unfair influences of hedge fund activity. But that is what they do despite illegal methods. The last short interest report, which covered only part of ENG’s drop in price, was down a very significant 25% - in a two-week period! This is the lowest level in years. Since then the stock went even lower I estimate we will see another decrease in short interest and that hedge funds have gone long on ENGlobal.
All companies have variances now and then. Look at recent news from Wal Mart, Home Depot and even Intel. They aren’t going anywhere and neither is ENGlobal. One factor is different though – these companies and many other companies aren’t growing at over 30% this year like ENGlobal is in a difficult economy. I think this says something about investment quality. ENGlobal is undervalued currently trading at 7 times earnings and a forward PE of about 4.5. This represents a good buy. Good luck to everyone.
29 October 2008
CEO Letter to ENGlobal Employees, Stockholders, Clients and Vendors
October 29, 2008
Dear ENGlobal Employees, Stockholders, Clients and Vendors:
During the past few months, we have all been inundated with gloomy financial news about what the future might hold. With this open letter, I do not intend to bother you with my impression of how our country's financial situation got to where it is today, because we have all heard the same news and can form our own views. To me, in its simplest terms, the economy currently lacks a critical ingredient - and that's confidence.
When consumers like you and me are confident, we willingly spend money on a variety of wants and needs, and this one factor makes up about two-thirds of all economic activity. When businesses are confident about future prospects, they readily make investments in anticipation of a future return on their investment. When banks are healthy and confident about getting repaid, they loan money, which is crucial to making the other two functions work.
I read this morning that consumer confidence has now "plunged" to the lowest level on record. So, in case there was any doubt left, any sense of optimism our nation has about the future, at least for now, has been replaced by another emotion - fear. While some part of this fear is being driven by reality and current events, I believe that we are all affected in a significant way by a steady stream of negative news. In somewhat of a self-fulfilling prophesy, we can all blame what's going on as a "bad economy," but the crisis we really face is one of confidence.
My mission with this correspondence is not to be an economic reporter - there are already more than enough folks covering that subject. But, I felt it was timely and important to share my optimistic perspective about our industry and our Company, especially given the times we now live in. Please consider the following ten factors, and why I believe they will serve as positive influences for ENGlobal's business going forward:
1. ENGlobal is fortunate to have served many of our valued clients over a long period of time, and these strong alliance relationships are the foundation of our business.
2. Our business relies on small to mid-sized projects, many of which fall into the "run and maintain" category. We are not nearly as dependent on huge grass roots capital projects as most others in our industry.
3. Our In-Plant staff remains a strong part of our Company, and not only provides valuable services for our clients, but is also a daily point-of-contact with them. This dedicated group has historically provided a steady source of business for ENGlobal.
4. Many of the projects we work on are not economically motivated, but instead are required for our clients to comply with various government regulations. We expect that regulatory oversight of our clients' industries will continue to increase over time, with some examples of these projects being: Process Safety Management (OSHA), Environmental Mandates (EPA), and Pipeline Integrity (DOT).
5. A significant part of our Automation Group's work is driven by our clients' need to replace aging and obsolete distributed control system (DCS) and analytical equipment. While at times these expenditures can be deferred, the need to replace DCS and other equipment has provided a reliable and recurring source of projects. We are focusing our efforts on improving operational efficiencies that will allow us to fully capitalize on these opportunities.
6. With the help of an acquisition by our Construction Group, ENGlobal is building a great reputation for its planning and implementation work on process plant turnarounds, another source of recurring business. We are currently investing in the future of this business and, coupled with this acquisition, we have greatly expanded the level of service we are able to provide on engineering, procurement, and construction (EPC) projects.
7. Three of our larger clients have publicly expressed that their spending plans for 2009 are basically unchanged from 2008 if, as their forecasts assume, the price of crude continues at around its current $65 level. I expect that this same "very little has changed" attitude will be heard from many of our other large midstream and downstream clients over the near term.
8. I believe our country has finally grown tired of being held captive to foreign sources of energy (as well we should). Both political parties have expressed their commitment to making energy independence a top priority. While there have been many false promises in the past, I anticipate that any real progress in this area will create work for ENGlobal.
9. About half of the states in the U.S. have enacted Renewable Portfolio Standards, which mandate a timeline and percentage for electricity generation from renewable sources such as wind, solar, geothermal, and biomass. Also, the Investment Tax Credit for these renewable energy projects was due to expire on December 31, 2008, but was extended as part of the recent "bailout" legislation. I believe these two factors, working together, will serve to drive demand for alternative energy projects in the future.
10. It is a fact that facilities in the energy industry, as well as in many other industries, are aging. No grass roots refinery has been built in the U.S. since 1976, and many of the country's large pipelines were installed over 50 years ago. Maintaining and rebuilding this aging infrastructure - an ENGlobal core competency - is going to be a future necessity that will benefit our Company.
As a result of these and other factors, ENGlobal has had recent success in continuing to land new work, in spite of the economic conditions you read about in the news. Even with our success and our belief that we have excellent prospects, we are not totally immune to the economic turmoil that may lie ahead. But my main message to you should be obvious: We firmly believe our Company is well positioned to ride-out any storms.
As always, our employees can help by being totally committed to quality and client satisfaction. My goal for ENGlobal is not just to meet our clients' expectations, but to look for ways to totally impress them by always going the extra mile. As a start, we need to be continuously asking questions in order to understand what our clients want. Next, we need to look for ways to give them positive surprises, which they don't often expect from service providers. I can guarantee that delivering on this one simple but important concept will be more effective for our business than 1,000+ PowerPoint presentations.
In closing, we want you to know that we expect continued success going forward, including a record level of performance and financial results from operations during the current year and a strong potential for 2009. I hope you will consider joining me by not running with the fearful crowd, but instead by showing the world some confidence. It will definitely be a breath of fresh air for those around you.
Thank you for your continued support of ENGlobal.
Sincerely,
William A. Coskey, P.E.
http://b2i.api.edgar-online.com/EFX_dll/EdgarPro.dll?FetchFilingConvPDF1?SessionID=XItMW3gtDXKbj-9&ID=6215684
Dear ENGlobal Employees, Stockholders, Clients and Vendors:
During the past few months, we have all been inundated with gloomy financial news about what the future might hold. With this open letter, I do not intend to bother you with my impression of how our country's financial situation got to where it is today, because we have all heard the same news and can form our own views. To me, in its simplest terms, the economy currently lacks a critical ingredient - and that's confidence.
When consumers like you and me are confident, we willingly spend money on a variety of wants and needs, and this one factor makes up about two-thirds of all economic activity. When businesses are confident about future prospects, they readily make investments in anticipation of a future return on their investment. When banks are healthy and confident about getting repaid, they loan money, which is crucial to making the other two functions work.
I read this morning that consumer confidence has now "plunged" to the lowest level on record. So, in case there was any doubt left, any sense of optimism our nation has about the future, at least for now, has been replaced by another emotion - fear. While some part of this fear is being driven by reality and current events, I believe that we are all affected in a significant way by a steady stream of negative news. In somewhat of a self-fulfilling prophesy, we can all blame what's going on as a "bad economy," but the crisis we really face is one of confidence.
My mission with this correspondence is not to be an economic reporter - there are already more than enough folks covering that subject. But, I felt it was timely and important to share my optimistic perspective about our industry and our Company, especially given the times we now live in. Please consider the following ten factors, and why I believe they will serve as positive influences for ENGlobal's business going forward:
1. ENGlobal is fortunate to have served many of our valued clients over a long period of time, and these strong alliance relationships are the foundation of our business.
2. Our business relies on small to mid-sized projects, many of which fall into the "run and maintain" category. We are not nearly as dependent on huge grass roots capital projects as most others in our industry.
3. Our In-Plant staff remains a strong part of our Company, and not only provides valuable services for our clients, but is also a daily point-of-contact with them. This dedicated group has historically provided a steady source of business for ENGlobal.
4. Many of the projects we work on are not economically motivated, but instead are required for our clients to comply with various government regulations. We expect that regulatory oversight of our clients' industries will continue to increase over time, with some examples of these projects being: Process Safety Management (OSHA), Environmental Mandates (EPA), and Pipeline Integrity (DOT).
5. A significant part of our Automation Group's work is driven by our clients' need to replace aging and obsolete distributed control system (DCS) and analytical equipment. While at times these expenditures can be deferred, the need to replace DCS and other equipment has provided a reliable and recurring source of projects. We are focusing our efforts on improving operational efficiencies that will allow us to fully capitalize on these opportunities.
6. With the help of an acquisition by our Construction Group, ENGlobal is building a great reputation for its planning and implementation work on process plant turnarounds, another source of recurring business. We are currently investing in the future of this business and, coupled with this acquisition, we have greatly expanded the level of service we are able to provide on engineering, procurement, and construction (EPC) projects.
7. Three of our larger clients have publicly expressed that their spending plans for 2009 are basically unchanged from 2008 if, as their forecasts assume, the price of crude continues at around its current $65 level. I expect that this same "very little has changed" attitude will be heard from many of our other large midstream and downstream clients over the near term.
8. I believe our country has finally grown tired of being held captive to foreign sources of energy (as well we should). Both political parties have expressed their commitment to making energy independence a top priority. While there have been many false promises in the past, I anticipate that any real progress in this area will create work for ENGlobal.
9. About half of the states in the U.S. have enacted Renewable Portfolio Standards, which mandate a timeline and percentage for electricity generation from renewable sources such as wind, solar, geothermal, and biomass. Also, the Investment Tax Credit for these renewable energy projects was due to expire on December 31, 2008, but was extended as part of the recent "bailout" legislation. I believe these two factors, working together, will serve to drive demand for alternative energy projects in the future.
10. It is a fact that facilities in the energy industry, as well as in many other industries, are aging. No grass roots refinery has been built in the U.S. since 1976, and many of the country's large pipelines were installed over 50 years ago. Maintaining and rebuilding this aging infrastructure - an ENGlobal core competency - is going to be a future necessity that will benefit our Company.
As a result of these and other factors, ENGlobal has had recent success in continuing to land new work, in spite of the economic conditions you read about in the news. Even with our success and our belief that we have excellent prospects, we are not totally immune to the economic turmoil that may lie ahead. But my main message to you should be obvious: We firmly believe our Company is well positioned to ride-out any storms.
As always, our employees can help by being totally committed to quality and client satisfaction. My goal for ENGlobal is not just to meet our clients' expectations, but to look for ways to totally impress them by always going the extra mile. As a start, we need to be continuously asking questions in order to understand what our clients want. Next, we need to look for ways to give them positive surprises, which they don't often expect from service providers. I can guarantee that delivering on this one simple but important concept will be more effective for our business than 1,000+ PowerPoint presentations.
In closing, we want you to know that we expect continued success going forward, including a record level of performance and financial results from operations during the current year and a strong potential for 2009. I hope you will consider joining me by not running with the fearful crowd, but instead by showing the world some confidence. It will definitely be a breath of fresh air for those around you.
Thank you for your continued support of ENGlobal.
Sincerely,
William A. Coskey, P.E.
http://b2i.api.edgar-online.com/EFX_dll/EdgarPro.dll?FetchFilingConvPDF1?SessionID=XItMW3gtDXKbj-9&ID=6215684
20 October 2008
Hedge Fund Operations
Here is the video that Jim Cramer made in late 2006 and caused enormous controversy. Jim Cramer talks about how hedge funds operate.What is so surprising is that after being off and on the Internet repeatedly theStreet.com decided they would repost it (for how long this time?) for the attention.
It is about 10 minutes long and very revealing all the way through to the end with real examples. By the way, when hes talking about moving a stock up or down - the method used is illegal because it is matched trading - it is just hard to catch. This is an educational view into the Level 2 world. I think all traders and professionals in publicly traded companies should see it - at least for knowledge exposure.
Link: http://link.brightcove.com/services/link/bcpid1459183594/bctid1163950434
It is about 10 minutes long and very revealing all the way through to the end with real examples. By the way, when hes talking about moving a stock up or down - the method used is illegal because it is matched trading - it is just hard to catch. This is an educational view into the Level 2 world. I think all traders and professionals in publicly traded companies should see it - at least for knowledge exposure.
Link: http://link.brightcove.com/services/link/bcpid1459183594/bctid1163950434
13 October 2008
ENGlobal Notes & Comments 3Q 2008
ENGlobal’s stock has been hit hard and I believe this is primarily by hedge funds and short interest. The bashers are heavy at it working the board as well as weak-minded negative posts touting other companies’ failures or sellers of other stocks as if ENGlobal logically follows by osmosis. ENGlobal is making money and growing at 80+ % for 2008. ENG will probably get a Zwieg White ranking for growth again this year. Next year analysts expect $1.01 – so get a grip folks.
When times are bad for hedge funds, and I think they are, I believe they will get meaner like we just saw. I am guessing most saw how Friday, 10 October ended after the surge up. Individuals cannot put orders in that fast on all the exchanges that was simultaneously used. This is a well-known computer trading cycle called a “Pump and Dump”. It was vicious too - up $1.18 and whipsawed down $1.00 with large blocks collected on the close from the shock drop. If this isn’t manipulation then I don't know what is. I am sure they sold out near the top and bought those blocks back at the close. They may have even shorted and bought back – why not, if you have that much control? These criminals are getting mean, desperate or both. You can see by the chart above how ENG is pushed farther down than the averages (click on it to enlarge).
All of this shows that stock can be controlled by hedge funds and less by free and fair markets when fear and manipulation are present. I have written the NASDAQ and SEC Enforcement about the computer manipulation. I got a response too. I have provided them with 45 basher ID’s also. If asked, I am sure Yahoo will give up the IP addresses considering they gave up those of Chinese freedom writers, which sent them to prison. I don’t think they are interested in basher individuals but more so with connections to hedgies.
The price of oil and ENGlobal: It really depends on how low oil goes. Contracts given out by oil companies are based on $45-50 a barrel, some as low as $35. I learned this directly from ENG senior management. Small dips do not affect ENGlobal’s earning capability. I think it affects people’s perception more and thereby the stock price. So until they see good earnings and growth associated with the memory of an oil dip they won’t break that hasty generalization.
ENGlobal is more than oil related. They serve chemical, gas, pipeline, construction and any industry automation. Are you starting to get the diversity and safer picture now? No matter how low oil gets pipelines still need inspecting and repair. The population and consumption is still growing. More right of ways are needed for oil, gas and transmission lines. It was announced that all ENG groups are expected to grow, with bigger growth from Construction and Automation. These are the higher margin groups. ENG announced a couple of DCS retrofits for automation. I have researched and found these can almost double the present one-year backlog. If you have this much backlog you can get through some dips.
I sense that the markets will bounce back soon and our economic recovery will probably be slow. But understand that the economy has been ailing for some time and ENGlobal has performed with good earnings and growth. Good luck to everyone.
When times are bad for hedge funds, and I think they are, I believe they will get meaner like we just saw. I am guessing most saw how Friday, 10 October ended after the surge up. Individuals cannot put orders in that fast on all the exchanges that was simultaneously used. This is a well-known computer trading cycle called a “Pump and Dump”. It was vicious too - up $1.18 and whipsawed down $1.00 with large blocks collected on the close from the shock drop. If this isn’t manipulation then I don't know what is. I am sure they sold out near the top and bought those blocks back at the close. They may have even shorted and bought back – why not, if you have that much control? These criminals are getting mean, desperate or both. You can see by the chart above how ENG is pushed farther down than the averages (click on it to enlarge).
All of this shows that stock can be controlled by hedge funds and less by free and fair markets when fear and manipulation are present. I have written the NASDAQ and SEC Enforcement about the computer manipulation. I got a response too. I have provided them with 45 basher ID’s also. If asked, I am sure Yahoo will give up the IP addresses considering they gave up those of Chinese freedom writers, which sent them to prison. I don’t think they are interested in basher individuals but more so with connections to hedgies.
The price of oil and ENGlobal: It really depends on how low oil goes. Contracts given out by oil companies are based on $45-50 a barrel, some as low as $35. I learned this directly from ENG senior management. Small dips do not affect ENGlobal’s earning capability. I think it affects people’s perception more and thereby the stock price. So until they see good earnings and growth associated with the memory of an oil dip they won’t break that hasty generalization.
ENGlobal is more than oil related. They serve chemical, gas, pipeline, construction and any industry automation. Are you starting to get the diversity and safer picture now? No matter how low oil gets pipelines still need inspecting and repair. The population and consumption is still growing. More right of ways are needed for oil, gas and transmission lines. It was announced that all ENG groups are expected to grow, with bigger growth from Construction and Automation. These are the higher margin groups. ENG announced a couple of DCS retrofits for automation. I have researched and found these can almost double the present one-year backlog. If you have this much backlog you can get through some dips.
I sense that the markets will bounce back soon and our economic recovery will probably be slow. But understand that the economy has been ailing for some time and ENGlobal has performed with good earnings and growth. Good luck to everyone.
02 October 2008
Louis Navellier Newsletter and Recommendations
October 2, 2008
Don't Let This Buying Opportunity Pass You By
I know I don't have to say this, but we're witnessing one of the most volatile periods in market history. It may seem like ordinary investors don't stand a chance right now, but don't despair. I'll admit it's hard to spot the opportunities amidst the chaos, but there are opportunities and I'm here to find them for you.
Consider Warren Buffett's actions lately. In late September, Buffett's Berkshire Hathaway invested at least $5 billion in Goldman Sachs to stave off fears that the large investment bank could face the same squeeze as Bear Stearns and Lehman Brothers. Berkshire also dipped into its cash cauldron when its MidAmerican Energy unit announced that it would purchase troubled utility Constellation Energy Group (CEG). And just yesterday, Buffett said he will buy $3 billion in preferred shares of General Electric (GE) because "GE is the symbol of American business to the world."
Is Buffett offering up this money as charity? Hardly. He's trying to profit—something he's pretty good at doing. And believe me, Buffett is definitely on to something.
Here's one of my tricks to finding great profit opportunities—watch the panic levels. The panic on Wall Street has been laid on thick in recent weeks. When the fear is this pervasive, almost everyone who is going to sell stock has already sold. More bad news will only push stocks down by so much. Case in point: GE has always been a market mover. When the company missed earnings in April it dragged the Dow down by 2%. But last week GE slashed its guidance for the third quarter and the whole year, and Wall Street didn't bat an eye. On the other hand, in these challenging times a handful of good news can make a stock feel like a real winner. And when that happens, we see stock prices skyrocket! Buffett is too smart to think that GE's current troubles will last forever, and is banking on huge returns once the stock recovers. Obviously, most of us can't buy a HUGE ownership stake in a company like Buffett did. But now more than ever is! the time for long term investors to "lock and load." A year or two down the line it'll be the smartest move you ever made!
This is one of the best buying opportunities we'll see in our lifetimes. The earnings environment is about to improve and there's still nearly $4 trillion in cash sitting on the sidelines waiting to flood back in.
Our strategy is clear. Those stocks with the strongest sales and earnings will lead the way when investors begin to jump pack into the market. As a Blue Chip Growth subscriber, you know that we've identified several stocks that are poised to rally in the weeks and months ahead. When markets recover, it usually isn't a graceful move up. It's a mad dash for stocks that leaves the timid holding cash and missing out on all the fun.
I believe that most of us will look back on this period as the best buying opportunity for fundamentally superior stocks in our lifetimes. And I don't want you to miss out!
I'll have the next issue of What's Working on Wall Street Now next Thursday, October 9.
Sincerely,Louis Navellierhttp://www.navelliergrowth.com/
Sincerely,Louis Navellierhttp://www.navelliergrowth.com/
28 September 2008
ENGlobal Awarded New Patent
The US Patent and Trademark Office has awarded ENGlobal Corporation a patent (#7,419,061) for developing the “Integrated Rack System”. Usually, a person represents a patent claim for a corporation throughout the process. James Dorsey, Vice President of Business Development for ENGlobal Automation Group (EAG) did this and was a co-inventor with Olan Weeks, who was then the CEO of ENGlobal Systems. EAG, Systems segment has been working hard on this for years with James continuing its intermediate and final development. James first showed me the system over 3 years ago. I covered it in my Annual Report to ENGlobal Investors. Here is what I said in 2005:
“James showed me a new patent pending Instrument Integrated Rack System that is used in the RIBs [Remote Instrument Buildings]. The design permits shorter wiring and cable lengths of up to 95% less. This represents a fantastic all around savings for ENGlobal and the customer. This makes for a simpler, faster build with less “system” to possibly fail.”
To summarize, the Integrated Rack System provides an average of 80-90% wire reduction. This reduces the material and labor costs from $150K – $300K per unit. Additionally, there is less fire/smoke detection and fire suppression concerns; along with this are less air conditioning needed and an overall energy savings. I remember a one million dollar unit that saved $288k on manufacturing costs. This is quite a marketing advantage. Moreover, anyone using this efficient system for any kind of instrument-controls-sensor-computer interface will have to obtain a license from ENGlobal.
You can see the patent filing here:
http://patft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&p=1&u=%2Fnetahtml%2FPTO%2Fsearch-bool.html&r=1&f=G&l=50&co1=AND&d=PTXT&s1=dorsey.INNM.&OS=IN/dorsey&RS=IN/dorsey
You can see the Patent Award announcement here:
http://www.uspto.gov/web/patents/patog/week36/OG/patentee/alphaD.htm
You can see the Integrated Rack System diagram here:
http://www.uspto.gov/web/patents/patog/week36/OG/html/1334-1/US07419061-20080902.html
Here are some ENGlobal comments from an article in 2005:
In March 2005, ENGlobal Systems, Inc., a subsidiary of ENGlobal Corporation ("ESI"), announced the development of a unique, patent-pending design system called "Integrated Rack(TM)." ENGlobal anticipates that this patent-pending Integrated Rack will allow it to install and maintain control, communication, and analytical equipment, either alone or in combination, in a more efficient manner than existing design systems permit. ENGlobal's new design system provides coordinated, cohesive and efficient support to both communication systems and power and environmental conditioning systems that otherwise would require a distributed signal. As a result of the launch of the patent-pending Integrated Rack, ENGlobal believes that it can provide its clients with an improved process for equipment installation and decrease required maintenance time and expense. ENGlobal expects that its clients' use of the patent-pending Integrated Rack will also result in lower energy consumption, reduction in the need for computer flooring, and better safety conditions.
Myron C. Glidewell, P.E., [Former] President of ESI, said, "The patent-pending Integrated Rack design system provides an advantageous design that we expect will give ENGlobal recognition in the marketplace and provide a clear differentiator to the fabrication techniques used by our competitors."
http://www.b2i.us/profiles/investor/ResLibraryView.asp?ResLibraryID=9034&GoTopage=6&BzID=702&Category=64&a=
Congratulations to ENGlobal, James Dorsey and Olan Weeks. This proves ENGlobal is innovative and deserves their motto: Global Thinking ~ Global Solutions. Good luck to everyone.
“James showed me a new patent pending Instrument Integrated Rack System that is used in the RIBs [Remote Instrument Buildings]. The design permits shorter wiring and cable lengths of up to 95% less. This represents a fantastic all around savings for ENGlobal and the customer. This makes for a simpler, faster build with less “system” to possibly fail.”
To summarize, the Integrated Rack System provides an average of 80-90% wire reduction. This reduces the material and labor costs from $150K – $300K per unit. Additionally, there is less fire/smoke detection and fire suppression concerns; along with this are less air conditioning needed and an overall energy savings. I remember a one million dollar unit that saved $288k on manufacturing costs. This is quite a marketing advantage. Moreover, anyone using this efficient system for any kind of instrument-controls-sensor-computer interface will have to obtain a license from ENGlobal.
You can see the patent filing here:
http://patft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&p=1&u=%2Fnetahtml%2FPTO%2Fsearch-bool.html&r=1&f=G&l=50&co1=AND&d=PTXT&s1=dorsey.INNM.&OS=IN/dorsey&RS=IN/dorsey
You can see the Patent Award announcement here:
http://www.uspto.gov/web/patents/patog/week36/OG/patentee/alphaD.htm
You can see the Integrated Rack System diagram here:
http://www.uspto.gov/web/patents/patog/week36/OG/html/1334-1/US07419061-20080902.html
Here are some ENGlobal comments from an article in 2005:
In March 2005, ENGlobal Systems, Inc., a subsidiary of ENGlobal Corporation ("ESI"), announced the development of a unique, patent-pending design system called "Integrated Rack(TM)." ENGlobal anticipates that this patent-pending Integrated Rack will allow it to install and maintain control, communication, and analytical equipment, either alone or in combination, in a more efficient manner than existing design systems permit. ENGlobal's new design system provides coordinated, cohesive and efficient support to both communication systems and power and environmental conditioning systems that otherwise would require a distributed signal. As a result of the launch of the patent-pending Integrated Rack, ENGlobal believes that it can provide its clients with an improved process for equipment installation and decrease required maintenance time and expense. ENGlobal expects that its clients' use of the patent-pending Integrated Rack will also result in lower energy consumption, reduction in the need for computer flooring, and better safety conditions.
Myron C. Glidewell, P.E., [Former] President of ESI, said, "The patent-pending Integrated Rack design system provides an advantageous design that we expect will give ENGlobal recognition in the marketplace and provide a clear differentiator to the fabrication techniques used by our competitors."
http://www.b2i.us/profiles/investor/ResLibraryView.asp?ResLibraryID=9034&GoTopage=6&BzID=702&Category=64&a=
Congratulations to ENGlobal, James Dorsey and Olan Weeks. This proves ENGlobal is innovative and deserves their motto: Global Thinking ~ Global Solutions. Good luck to everyone.
24 September 2008
4Q and Beyond Boost to Earnings
4Q and Beyond Boost
The damages caused by Hurricane Ike are tremendous and will take months to assess. Business operations, refineries, chemical plants and manufacturing operations are turning to companies like ENGlobal for repair and staffing to resume normal operations. This will take months, possibly years to recover as with Hurricanes Katrina and Rita. Some companies needing repair throw in expansion plans on top of return to operation efforts because restoration and construction services are not only at a premium they are just plain hard to attain when damages are widespread. Here is an example of thousands of damaged operations:
http://www.marketwatch.com/news/story/pliant-corporation-announces-product-allocations/story.aspx?guid=%7B36A3F14F-8F95-4F5B-8B09-40BFC345D030%7D&dist=hppr
I recently addressed 2Q & 3Q in a blog post:
http://t38pilot8202.blogspot.com/2008/09/englobal-2q-and-3q-analysis.html
Looking ahead to 4Q and beyond expect a major boost to ENGlobal’s top and bottom lines. This happened after Hurricanes Katrina and Rita if you examine continuing operation. You have to be a good analyst and factor out the write down problems they had during this period. However, enough information was given and some analysts were keen on this and commented during conference calls on the growth for continuing operations.
From 2Q & 3Q analysis one can see ENGlobal is hitting on all cylinders now with expected improvement in all divisions. Incremental improvement is expected in Engineering. Moderate improvement is expected in the Land Group. This group is moving into electrical transmission right of ways! Bill Coskey, ENGlobal’s CEO, predicts substantial growth in Construction and Automation. These are high margin groups. A general announcement was made for multiple contracts for Automation Group. What all this means is more profit for ENGlobal. They are operating at full capacity.
This begs a question. How do you meet the stepped up demand while operating at full capacity? Full capacity is a moving target for a growth company. ENGlobal has been very successful at it by adding employees better than its competitors. I just sent ENGlobal an employee this week for the Automation Group. You also meet demand with overtime. If you are a corporation that needs to get back to operations you are willing to pay time and a half. Think what that does for ENGlobal. You don’t have to log a whole lot of it before overtime hits the bottom line. Based on the past there looks to be plenty of it coming. Good luck to everyone.
The damages caused by Hurricane Ike are tremendous and will take months to assess. Business operations, refineries, chemical plants and manufacturing operations are turning to companies like ENGlobal for repair and staffing to resume normal operations. This will take months, possibly years to recover as with Hurricanes Katrina and Rita. Some companies needing repair throw in expansion plans on top of return to operation efforts because restoration and construction services are not only at a premium they are just plain hard to attain when damages are widespread. Here is an example of thousands of damaged operations:
http://www.marketwatch.com/news/story/pliant-corporation-announces-product-allocations/story.aspx?guid=%7B36A3F14F-8F95-4F5B-8B09-40BFC345D030%7D&dist=hppr
I recently addressed 2Q & 3Q in a blog post:
http://t38pilot8202.blogspot.com/2008/09/englobal-2q-and-3q-analysis.html
Looking ahead to 4Q and beyond expect a major boost to ENGlobal’s top and bottom lines. This happened after Hurricanes Katrina and Rita if you examine continuing operation. You have to be a good analyst and factor out the write down problems they had during this period. However, enough information was given and some analysts were keen on this and commented during conference calls on the growth for continuing operations.
From 2Q & 3Q analysis one can see ENGlobal is hitting on all cylinders now with expected improvement in all divisions. Incremental improvement is expected in Engineering. Moderate improvement is expected in the Land Group. This group is moving into electrical transmission right of ways! Bill Coskey, ENGlobal’s CEO, predicts substantial growth in Construction and Automation. These are high margin groups. A general announcement was made for multiple contracts for Automation Group. What all this means is more profit for ENGlobal. They are operating at full capacity.
This begs a question. How do you meet the stepped up demand while operating at full capacity? Full capacity is a moving target for a growth company. ENGlobal has been very successful at it by adding employees better than its competitors. I just sent ENGlobal an employee this week for the Automation Group. You also meet demand with overtime. If you are a corporation that needs to get back to operations you are willing to pay time and a half. Think what that does for ENGlobal. You don’t have to log a whole lot of it before overtime hits the bottom line. Based on the past there looks to be plenty of it coming. Good luck to everyone.
17 September 2008
ENGlobal 2Q and 3Q Analysis
ENGlobal 2Q and 3Q Analysis
ENGlobal Reports Record Second Quarter Results
The second quarter CC transcript has been posted so some analysis is in order. First, let me alert you that the transcript contains many errors; some of these errors change the intended meaning. I discovered this when what I was reading did not match my memory. I have the correct language in what I have written by reading the transcript and listening to the actual recording. To get accurate information on the CC I suggest you NOT rely on the transcript but listen to the audio recording available at ENGlobal's website instead.
In ENGlobal's tradition the 2008 2Q report was a record as predicted with the past three-year's second quarter headlines. With the present 2Q report and in conjunction with the conference call (CC) you can extrapolate some very good expectations, progress and continued growth. As far as what to expect in 3Q there were direct bullish statements, some very interesting clues and good news buried within. 2Q earnings were reported at .24 cents, which represents a huge increase over 2Q 2007 of .14 cents (diluted) and a 50% surprise over analyst's expectations. ENGlobal has had a history of keeping their slate clean. Excluding reserves taken in 2Q ENGlobal would have earned approximately .27 cents! This better reflects continuing operations.
To view the CC in proper context lets review 2Q highlights from the news release.
Second Quarter 2008 Highlights Compared to Second Quarter 2007:
· Revenue increased 52% to a record $136 million.
· Net income increased 71% to $6.7 million.
· Operating profit margin improved to 8.5% from 7.7%.
· 100% of quarter-over-quarter revenue increase is attributable to organic or non-acquisition related growth.
· Bi-weekly billable hours averaged 235,000 hours, up 24%, compared to 189,000 hours.
· Employee count increased 17% to approximately 2,900.
More from the release:
Revenue increased $46.4 million!
On average, the day's sales outstanding decreased to 61 days at June 30, 2008, from 62 days at March 31, 2008 and from 70 days at June 30, 2007. During the second quarter of 2008, the Company produced positive cash from operations of $4.1 million, compared with $524,000 in the second quarter of 2007.
Long-term debt, net of current portion, decreased 9.6%. ENGlobal's interest expense during the second quarter was $413,000, a decreaseof approximately $287,000, or 41%, from the prior year period. The Company's overall utilization percentage, inclusive of overhead personnel, is approximately 93% for the second quarter 2008 compared to 91% for the comparable period of 2007.
This is Key: "Management's expectation for the second half of 2008 is that our Engineering, Construction, Automation and Land businesses will all continue on a similar strong track, with consolidated profits from continuing operations expected to meet or exceed those produced during the first half."
Now let's review the CC which has a plethora of information and guidance:
Bill Coskey started the presentation (I have abstracted key information):
"ENGlobal is benefiting from a healthy market for our services with our top line growing, at an exceptional rate, 52% in the latest quarter and all of this growth was internally generated which makes it even better. Operating margin increased to 8.5%, an increase from7.7%."
"Most of you have already known that ENGlobal has stated a compound annual revenue growth target of 25% together with an operating margin goal of 8.0% for the full year 2008. We are on track to either meet or exceed both of these targets this year."
"Our inspection operation where growth is directly related to the number of inspection personnel we now have working on pipeline construction sprints. It is a good indicator of the strong trends for domestic pipeline activity."
"Procurement subcontracting activity showed a $12 million increase.This is a cost plus activity at a low margin and sometimes referred to as procurement pass-through revenue. We expect this increased level of procurement pass-through activity to continue into the third quarter of 2008."
"On a pro forma basis and eliminating the procurement pass-through revenue and margin our consolidated gross profit margin on this basis would have increased from the 14.9% that we reported to approximately 16. 2%."
"Overall ENGlobal's headcount has exceeded expectations, reaching approximately 2900 employees in the second quarter of 2008. We added 300 employees in the second quarter alone, most of which were added to our pipeline inspection group."
"Charges related to bad debt and reserves from possible claims amounted to $1.3 million in the second quarter". [This reserve taken is a one time event, and subtracted ~3 cents from continuing operations. Therefore, add it back to reflect the true nature of 2Q and what will happen 3Q. Also, keep in mind that the sale of a building in Baton Rouge will add 1.4 million in 3Q.]
"Regarding external growth, we continue to target acquisitions that equate to roughly 10% additional revenue over the next year. We choose to do these transactions for two reasons, first of all, we have had good success from selling newly acquired capabilities to our existing clients and number two, we are seeking new locations to better serve our clients within North America. We do not expect to have to dilute our stockholders in order to carry up our external growth plan."
Mr. Coskey spoke about the future based on trend performance:
"I would like to close with a few comments about why I am still excited about ENGlobal's future. First of all, our engineering segment (our anchor business), I really like our consistent and predictable business model as our engineering work mainly consist of alliance relationships, the counted in-plant personnel and our performance on small to mid sized cost plus projects. Many of our projects are driven by ongoing maintenance issues, retro fits of existing facilities or government compliance mandates."[Translation: This accelerated project activity will continue. This was clearly stated at the Annual Meeting.]
"I believe our engineering operation is well managed and supported by a top-notch group of business development professionals and we also have several interesting internal growth initiatives currently underway. Second, is our construction segment, we have recently changed management at our inspection group. This should serve to drive some needed margin improvement." [Translation: More growth coming and look for better results in 3Q.]
"As inspection services has really grown it currently represents about 87% of our construction segment. The higher margin piece of our construction group, which specializes in managing EPC projects, plant turnarounds and commissioning new facilities, is a very aggressive group. Given their many current opportunities, my expectation is that our construction group will continue to be a fast growing business with improving profitability over time given a shift toward our higher margin capability." [Translation: Revenue from Construction will grow and increase the ENGlobal bottom line.]
"In terms of automation: During 2008, we have landed two significant multi-year projects to upgrade control analyzer systems at large refineries. Automation's billable hours should increase and variable overhead should decrease over the balance of this year and next." [Translation: Automation is expected to contribute more to the bottom line from new contracts landed, plus, greater segment efficiency will contribute. This is management working on both sides of the bottom line formula.]
"Also promising [for Automation] is that there are several more significant automation proposals pending similar to the ones we have been awarded. I like the fact that our automation business is being driven by our client's need to replace obsolete electronic and pneumatic control system as well as analyzer equipment and this provides a recurring stream of work." [Translation: Automation Group is growing with more profit on the way.]
Writer's note: I would like to inject some thoughts about these types of contracts that Automation performs. First, there is the Systems segment. I reported seeing the shops at completely full capacity – The monies from these contracts have only begun to filter in, logically, from the state of finish I observed. Work was stacked in the parking lots. Secondly, the balance of work Automation performs, among its services, are DCS (Distribution Control Systems) retrofits. These retrofits took a priority behind basic Y2K computer/software upgrades years ago. The already old automation and control equipment needs replacement badly. I have been searching for information about the general size of these contracts online with various businesses. What I found is that these contracts are huge in values even for medium sized factories and refineries. Contracts range from 50-120 million dollars. A few contracts as we potentially anticipate from these comments could easily double ENGlobal's backlog!
Mr. Coskey continues: "And, finally our land group. Pretty simply, I see continued strong pipeline activity both for gathering and mainline projects that drives demand for new right of way. This together with emerging projects to build electric power transmission line should keep our land business busy for the foreseeable future."
Here are some key abstracted comments from Bob Raiford:
"A lot of the specific details of our second quarter results were disclosed in our press release this morning but I like to highlight some selected items. We expect these specific project reserves to be of a non reoccurring nature and fully expect that the reserves taken during the period will meet all material coverage deductibles, legal expenses and settlement levels."
"For this six month period just ended, our overall long-term commitments, net of current portion, decreased approximately 9%, approximately $2.5 million from $29.3 million as of December 31 of 2007. We do not expect our tax rate for 2008 to fairly change for approximately 40% effective tax rate for the first six month period of the current year."
"At this time, we expect our operations to remain in a positive cash flow position for the balance of the year. The July 24 payoff of the $1.4 million note receivable for the sale of our office building become a previously owned in Baton Rouge, Louisiana will positively impact cash requirements during the third quarter."
Q&A was especially revealing:
Craig Bell - SMH Capital: "It is a pretty impressive quarter. Since you are saying that a significant amount of the increase is related to pay raises and billing rates, does that sort of imply that maybe this level of revenue is sustainable going forward because in the past you had good solid increases quarter to quarter but it has been pretty consistent in this quarter such a significant jump up. I mean, you think you can maintain sort of that level?"
Bill Coskey: "Yes, I do not see anything over the near term taking us off the track we are currently on and I would not be surprised to see our third quarter meet or exceed what we did in the second quarter."
Graham Madison - Lazard Capital Markets: "This is quite a quarter. Congratulations. Just quickly, in the past you mentioned that looking at the quarters over the year, the 3Q tends to be better than 2Q. Is there anything that you think that wouldn't be the case this year? I mean was there any projects that moved to the second quarter which help boost the revenue in the performance?"
Bill Coskey: "I have always equated our second and third quarter and equated our first and fourth quarter. I would look for our third quarter to be similar to our second or our fourth quarter to be similar to our first. It is kind of the way our year goes."
Graham Madison: "And then just looking at some of the margin improvements in the other segments outside of engineering, what was driving that? Was that more would you say on broader scope that is more of an impact of better contracting terms that you are signing up or is it more results of the better management execution and operational execution that you talked about in prior quarters?"
Bill Coskey: "I think it is a little both. I think we are continually working on better contracts. The new business would bring in just provide better margins for our company. I think we have just made some efforts to improve our efficiencies, improve utilization. Bob, do you have anything to add to that? It is a lot of blocking and tackling. It is not any one magic bullet."
Graham Madison: "Well, there is nothing to think that some of these margins would not, as you had mentioned earlier, wouldn't be sustainable going forward?"
Bill Coskey: "No, I would see margins to be sustainable going forward especially after you back out the impact of these past two revenues." [This is a key statement here folks.]
Rich Wesolowski - Sidoti & Company: "Can you give us maybe a gross margin for each segment that you would consider to be strong and realistic performance in today's environment?"
Bill Coskey: "I think what I would say as far as engineering segment is going to be right around that same area on an ongoing basis, possibly ticking up very incrementally. I would expect to see some pretty good improvement in our automation and construction group just based on project awards, especially in the construction group where we have this huge mix of inspections, pipeline inspection revenue which by nature is low margin and as we tend to change that mix over the sum of our higher value services like managing EPC projects or managing turn around projects, my belief is that over time that mix will change from 8713 to much more favorable on high margin side."
"I believe our land groups should be pretty steady going forward and it is kind of "it is what it is" today if we may take some incremental improvements. So engineering and land talking about the same slightly improving but we have the opportunity to make some pretty significant improvements in automation and construction." [Translation: ENGlobal is going to do even better on the bottom line 3Q and beyond.]
Rich Wesolowski: "Okay, you mentioned that the 300 headcount that you add in the quarter, most of that was in pipeline inspection. Can you reconcile that with the expectation that the other part of construction is going to be going up as the percentage of that revenue?"
Bill Coskey: "It was based on my knowledge and some opportunities they have and also based on my knowledge of efforts that are being made to raise margins within the inspection group itself after the change in management. I believe we are going on to two things. We are going to improve the inspection margins plus we are going to change the mix. It is just based on some opportunities we have here. [Translation: Performance will be better - more money.]
Graham Madison - Lazard Capital Markets: "Hey guys just to follow upon the inspection and construction margins. Now that you have made the personnel changes, did we see any of the margin improvement or the benefit from that personnel change in this quarter or will that be something we will see in coming quarters more?
Bill Coskey: "I think that is something you should look forward incoming quarters. That is a fairly recent change and I do not believe that any of that impact hit the second quarter. [Translation: Pretty obvious, margin benefit will be experienced in 3Q onward, so future results should be higher than 2Q.]
Graham Madison: "Okay great and then on the land group, I mean would it be fair to say that we could see revenue growth sort of consistently drive up with the increase in pipeline work that's going on out there?"
Bill Coskey: "There are limiting factors to the ability to access right of way for the projects. I think they are more limited by the ability to add staff than anything. I think there is more project than staff but, yes, there are many, many opportunities especially with this emerging build out on electric power transmission that we could participate in. That is another area." [Translation: Land will grow.]
Conclusion
PE Ratios and other possibilities: As stated ENGlobal earned .39 cents so far in 2008 and earnings from continuing operations for the year are expected by analysts to be ~. 82 cents. 3Q estimate is .23cents. Based on the conference call comments I think ENG will surprise upward in both earnings and revenue. 3Q sales growth varies by site and formulas used, however, all indicate growth is huge with most measuring at significant levels of over 35%. Overall growth for
ENGlobal in 2008 is listed at 82.2%! The five-analyst average forEPS in 2009 is $1.01.
Fair value of a growth company is based on a conservative forward PEof 20-30. Higher PE, closer to 30 in a good economy and less in apoor one, like at present. It appears the economy is improving slowly so I will use 24. Calculating a fair price using the current year at .82 cents yields a price of $19.68, but this would be a combination of trailing earnings and near-term expectations. Again, I think those expectations will be beat. Growth companies are best valued on forward PE. At $1.03 this yields a price of $24.72, if you add any of the reserves taken the price goes up. If you sold ENGlobal with a 20% premium this yields a price range of $23.62-29.67. A merger event would get you a better exchange for your stock in that scenario.
I have spoken with Mike Burrow, ENGlobal's former CEO. He thinks the company is strong and is easily a $20-25 stock. With his approval, I will relay he is buying ENGlobal now. I am buying ENG now also. Regardless of any potential scenario the data indicates that ENGlobal is earning money and growing in a bad economy. Who wouldn't want to own a stock that is growing profits when you hear consistent bad news in a poor economy? ENGlobal is exactly what you want for safety and to increase your investment value. Good luck to everyone.
ENGlobal Reports Record Second Quarter Results
The second quarter CC transcript has been posted so some analysis is in order. First, let me alert you that the transcript contains many errors; some of these errors change the intended meaning. I discovered this when what I was reading did not match my memory. I have the correct language in what I have written by reading the transcript and listening to the actual recording. To get accurate information on the CC I suggest you NOT rely on the transcript but listen to the audio recording available at ENGlobal's website instead.
In ENGlobal's tradition the 2008 2Q report was a record as predicted with the past three-year's second quarter headlines. With the present 2Q report and in conjunction with the conference call (CC) you can extrapolate some very good expectations, progress and continued growth. As far as what to expect in 3Q there were direct bullish statements, some very interesting clues and good news buried within. 2Q earnings were reported at .24 cents, which represents a huge increase over 2Q 2007 of .14 cents (diluted) and a 50% surprise over analyst's expectations. ENGlobal has had a history of keeping their slate clean. Excluding reserves taken in 2Q ENGlobal would have earned approximately .27 cents! This better reflects continuing operations.
To view the CC in proper context lets review 2Q highlights from the news release.
Second Quarter 2008 Highlights Compared to Second Quarter 2007:
· Revenue increased 52% to a record $136 million.
· Net income increased 71% to $6.7 million.
· Operating profit margin improved to 8.5% from 7.7%.
· 100% of quarter-over-quarter revenue increase is attributable to organic or non-acquisition related growth.
· Bi-weekly billable hours averaged 235,000 hours, up 24%, compared to 189,000 hours.
· Employee count increased 17% to approximately 2,900.
More from the release:
Revenue increased $46.4 million!
On average, the day's sales outstanding decreased to 61 days at June 30, 2008, from 62 days at March 31, 2008 and from 70 days at June 30, 2007. During the second quarter of 2008, the Company produced positive cash from operations of $4.1 million, compared with $524,000 in the second quarter of 2007.
Long-term debt, net of current portion, decreased 9.6%. ENGlobal's interest expense during the second quarter was $413,000, a decreaseof approximately $287,000, or 41%, from the prior year period. The Company's overall utilization percentage, inclusive of overhead personnel, is approximately 93% for the second quarter 2008 compared to 91% for the comparable period of 2007.
This is Key: "Management's expectation for the second half of 2008 is that our Engineering, Construction, Automation and Land businesses will all continue on a similar strong track, with consolidated profits from continuing operations expected to meet or exceed those produced during the first half."
Now let's review the CC which has a plethora of information and guidance:
Bill Coskey started the presentation (I have abstracted key information):
"ENGlobal is benefiting from a healthy market for our services with our top line growing, at an exceptional rate, 52% in the latest quarter and all of this growth was internally generated which makes it even better. Operating margin increased to 8.5%, an increase from7.7%."
"Most of you have already known that ENGlobal has stated a compound annual revenue growth target of 25% together with an operating margin goal of 8.0% for the full year 2008. We are on track to either meet or exceed both of these targets this year."
"Our inspection operation where growth is directly related to the number of inspection personnel we now have working on pipeline construction sprints. It is a good indicator of the strong trends for domestic pipeline activity."
"Procurement subcontracting activity showed a $12 million increase.This is a cost plus activity at a low margin and sometimes referred to as procurement pass-through revenue. We expect this increased level of procurement pass-through activity to continue into the third quarter of 2008."
"On a pro forma basis and eliminating the procurement pass-through revenue and margin our consolidated gross profit margin on this basis would have increased from the 14.9% that we reported to approximately 16. 2%."
"Overall ENGlobal's headcount has exceeded expectations, reaching approximately 2900 employees in the second quarter of 2008. We added 300 employees in the second quarter alone, most of which were added to our pipeline inspection group."
"Charges related to bad debt and reserves from possible claims amounted to $1.3 million in the second quarter". [This reserve taken is a one time event, and subtracted ~3 cents from continuing operations. Therefore, add it back to reflect the true nature of 2Q and what will happen 3Q. Also, keep in mind that the sale of a building in Baton Rouge will add 1.4 million in 3Q.]
"Regarding external growth, we continue to target acquisitions that equate to roughly 10% additional revenue over the next year. We choose to do these transactions for two reasons, first of all, we have had good success from selling newly acquired capabilities to our existing clients and number two, we are seeking new locations to better serve our clients within North America. We do not expect to have to dilute our stockholders in order to carry up our external growth plan."
Mr. Coskey spoke about the future based on trend performance:
"I would like to close with a few comments about why I am still excited about ENGlobal's future. First of all, our engineering segment (our anchor business), I really like our consistent and predictable business model as our engineering work mainly consist of alliance relationships, the counted in-plant personnel and our performance on small to mid sized cost plus projects. Many of our projects are driven by ongoing maintenance issues, retro fits of existing facilities or government compliance mandates."[Translation: This accelerated project activity will continue. This was clearly stated at the Annual Meeting.]
"I believe our engineering operation is well managed and supported by a top-notch group of business development professionals and we also have several interesting internal growth initiatives currently underway. Second, is our construction segment, we have recently changed management at our inspection group. This should serve to drive some needed margin improvement." [Translation: More growth coming and look for better results in 3Q.]
"As inspection services has really grown it currently represents about 87% of our construction segment. The higher margin piece of our construction group, which specializes in managing EPC projects, plant turnarounds and commissioning new facilities, is a very aggressive group. Given their many current opportunities, my expectation is that our construction group will continue to be a fast growing business with improving profitability over time given a shift toward our higher margin capability." [Translation: Revenue from Construction will grow and increase the ENGlobal bottom line.]
"In terms of automation: During 2008, we have landed two significant multi-year projects to upgrade control analyzer systems at large refineries. Automation's billable hours should increase and variable overhead should decrease over the balance of this year and next." [Translation: Automation is expected to contribute more to the bottom line from new contracts landed, plus, greater segment efficiency will contribute. This is management working on both sides of the bottom line formula.]
"Also promising [for Automation] is that there are several more significant automation proposals pending similar to the ones we have been awarded. I like the fact that our automation business is being driven by our client's need to replace obsolete electronic and pneumatic control system as well as analyzer equipment and this provides a recurring stream of work." [Translation: Automation Group is growing with more profit on the way.]
Writer's note: I would like to inject some thoughts about these types of contracts that Automation performs. First, there is the Systems segment. I reported seeing the shops at completely full capacity – The monies from these contracts have only begun to filter in, logically, from the state of finish I observed. Work was stacked in the parking lots. Secondly, the balance of work Automation performs, among its services, are DCS (Distribution Control Systems) retrofits. These retrofits took a priority behind basic Y2K computer/software upgrades years ago. The already old automation and control equipment needs replacement badly. I have been searching for information about the general size of these contracts online with various businesses. What I found is that these contracts are huge in values even for medium sized factories and refineries. Contracts range from 50-120 million dollars. A few contracts as we potentially anticipate from these comments could easily double ENGlobal's backlog!
Mr. Coskey continues: "And, finally our land group. Pretty simply, I see continued strong pipeline activity both for gathering and mainline projects that drives demand for new right of way. This together with emerging projects to build electric power transmission line should keep our land business busy for the foreseeable future."
Here are some key abstracted comments from Bob Raiford:
"A lot of the specific details of our second quarter results were disclosed in our press release this morning but I like to highlight some selected items. We expect these specific project reserves to be of a non reoccurring nature and fully expect that the reserves taken during the period will meet all material coverage deductibles, legal expenses and settlement levels."
"For this six month period just ended, our overall long-term commitments, net of current portion, decreased approximately 9%, approximately $2.5 million from $29.3 million as of December 31 of 2007. We do not expect our tax rate for 2008 to fairly change for approximately 40% effective tax rate for the first six month period of the current year."
"At this time, we expect our operations to remain in a positive cash flow position for the balance of the year. The July 24 payoff of the $1.4 million note receivable for the sale of our office building become a previously owned in Baton Rouge, Louisiana will positively impact cash requirements during the third quarter."
Q&A was especially revealing:
Craig Bell - SMH Capital: "It is a pretty impressive quarter. Since you are saying that a significant amount of the increase is related to pay raises and billing rates, does that sort of imply that maybe this level of revenue is sustainable going forward because in the past you had good solid increases quarter to quarter but it has been pretty consistent in this quarter such a significant jump up. I mean, you think you can maintain sort of that level?"
Bill Coskey: "Yes, I do not see anything over the near term taking us off the track we are currently on and I would not be surprised to see our third quarter meet or exceed what we did in the second quarter."
Graham Madison - Lazard Capital Markets: "This is quite a quarter. Congratulations. Just quickly, in the past you mentioned that looking at the quarters over the year, the 3Q tends to be better than 2Q. Is there anything that you think that wouldn't be the case this year? I mean was there any projects that moved to the second quarter which help boost the revenue in the performance?"
Bill Coskey: "I have always equated our second and third quarter and equated our first and fourth quarter. I would look for our third quarter to be similar to our second or our fourth quarter to be similar to our first. It is kind of the way our year goes."
Graham Madison: "And then just looking at some of the margin improvements in the other segments outside of engineering, what was driving that? Was that more would you say on broader scope that is more of an impact of better contracting terms that you are signing up or is it more results of the better management execution and operational execution that you talked about in prior quarters?"
Bill Coskey: "I think it is a little both. I think we are continually working on better contracts. The new business would bring in just provide better margins for our company. I think we have just made some efforts to improve our efficiencies, improve utilization. Bob, do you have anything to add to that? It is a lot of blocking and tackling. It is not any one magic bullet."
Graham Madison: "Well, there is nothing to think that some of these margins would not, as you had mentioned earlier, wouldn't be sustainable going forward?"
Bill Coskey: "No, I would see margins to be sustainable going forward especially after you back out the impact of these past two revenues." [This is a key statement here folks.]
Rich Wesolowski - Sidoti & Company: "Can you give us maybe a gross margin for each segment that you would consider to be strong and realistic performance in today's environment?"
Bill Coskey: "I think what I would say as far as engineering segment is going to be right around that same area on an ongoing basis, possibly ticking up very incrementally. I would expect to see some pretty good improvement in our automation and construction group just based on project awards, especially in the construction group where we have this huge mix of inspections, pipeline inspection revenue which by nature is low margin and as we tend to change that mix over the sum of our higher value services like managing EPC projects or managing turn around projects, my belief is that over time that mix will change from 8713 to much more favorable on high margin side."
"I believe our land groups should be pretty steady going forward and it is kind of "it is what it is" today if we may take some incremental improvements. So engineering and land talking about the same slightly improving but we have the opportunity to make some pretty significant improvements in automation and construction." [Translation: ENGlobal is going to do even better on the bottom line 3Q and beyond.]
Rich Wesolowski: "Okay, you mentioned that the 300 headcount that you add in the quarter, most of that was in pipeline inspection. Can you reconcile that with the expectation that the other part of construction is going to be going up as the percentage of that revenue?"
Bill Coskey: "It was based on my knowledge and some opportunities they have and also based on my knowledge of efforts that are being made to raise margins within the inspection group itself after the change in management. I believe we are going on to two things. We are going to improve the inspection margins plus we are going to change the mix. It is just based on some opportunities we have here. [Translation: Performance will be better - more money.]
Graham Madison - Lazard Capital Markets: "Hey guys just to follow upon the inspection and construction margins. Now that you have made the personnel changes, did we see any of the margin improvement or the benefit from that personnel change in this quarter or will that be something we will see in coming quarters more?
Bill Coskey: "I think that is something you should look forward incoming quarters. That is a fairly recent change and I do not believe that any of that impact hit the second quarter. [Translation: Pretty obvious, margin benefit will be experienced in 3Q onward, so future results should be higher than 2Q.]
Graham Madison: "Okay great and then on the land group, I mean would it be fair to say that we could see revenue growth sort of consistently drive up with the increase in pipeline work that's going on out there?"
Bill Coskey: "There are limiting factors to the ability to access right of way for the projects. I think they are more limited by the ability to add staff than anything. I think there is more project than staff but, yes, there are many, many opportunities especially with this emerging build out on electric power transmission that we could participate in. That is another area." [Translation: Land will grow.]
Conclusion
PE Ratios and other possibilities: As stated ENGlobal earned .39 cents so far in 2008 and earnings from continuing operations for the year are expected by analysts to be ~. 82 cents. 3Q estimate is .23cents. Based on the conference call comments I think ENG will surprise upward in both earnings and revenue. 3Q sales growth varies by site and formulas used, however, all indicate growth is huge with most measuring at significant levels of over 35%. Overall growth for
ENGlobal in 2008 is listed at 82.2%! The five-analyst average forEPS in 2009 is $1.01.
Fair value of a growth company is based on a conservative forward PEof 20-30. Higher PE, closer to 30 in a good economy and less in apoor one, like at present. It appears the economy is improving slowly so I will use 24. Calculating a fair price using the current year at .82 cents yields a price of $19.68, but this would be a combination of trailing earnings and near-term expectations. Again, I think those expectations will be beat. Growth companies are best valued on forward PE. At $1.03 this yields a price of $24.72, if you add any of the reserves taken the price goes up. If you sold ENGlobal with a 20% premium this yields a price range of $23.62-29.67. A merger event would get you a better exchange for your stock in that scenario.
I have spoken with Mike Burrow, ENGlobal's former CEO. He thinks the company is strong and is easily a $20-25 stock. With his approval, I will relay he is buying ENGlobal now. I am buying ENG now also. Regardless of any potential scenario the data indicates that ENGlobal is earning money and growing in a bad economy. Who wouldn't want to own a stock that is growing profits when you hear consistent bad news in a poor economy? ENGlobal is exactly what you want for safety and to increase your investment value. Good luck to everyone.
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