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.