Interest Rate Cuts And Salt Lake City Mill Expansion Will Strengthen Precast And Steel Pressure Pipe Segments

Key Takeaways

• Anticipated interest rate cuts and expanded production capacity are expected to boost revenue and margins in the Precast segment.
  
• Strong bidding in Steel Pressure Pipe and potential M&A in Precast space support revenue growth and improved production efficiencies.
  
• Declines in backlog, price volatility, high interest rates, and strategic investment risks present multiple challenges to Northwest Pipe's future revenue and margin stability.

Catalysts

Engages in the manufacture and supply of water-related infrastructure products in North America.

• Anticipated Federal Reserve interest rate cuts are expected to strengthen the nonresidential construction market, improving revenue and potentially raising margins in the Precast segment.
  
• The completion of the new reinforced concrete pipe and manhole mill in Salt Lake City will unlock additional production capacity and capabilities, positioning the Geneva business for further growth, which could bolster revenue and improve production efficiency.
  
• The ongoing focus on organic growth through Precast Product Spread strategy is expected to expand capacity utilization and enhance overall efficiency, positively impacting revenue growth and margin improvement in the Precast segment.
  
• Continued strong bidding environment in the Steel Pressure Pipe segment with future IIJA-funded projects anticipated to maintain high production levels, thus supporting stable or improved gross margins and increased gross profit.
  
• Strategic evaluations of M&A opportunities in the Precast-related space could expand manufacturing capabilities, improve production efficiencies, and enhance margins, all contributing to earnings growth if successful.

Northwest Pipe Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Northwest Pipe's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.1% today to 7.1% in 3 years time.
• Analysts expect earnings to reach $35.9 million (and earnings per share of $3.48) by about December 2027, up from $29.6 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $40.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.0x on those 2027 earnings, up from 17.5x today. This future PE is lower than the current PE for the US Construction industry at 29.8x.
• Analysts expect the number of shares outstanding to grow by 1.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.59%, as per the Simply Wall St company report.

Northwest Pipe Future Earnings Per Share Growth

Risks

• The decline in backlog from $348 million to $282 million may indicate potential future revenue challenges, especially if the backlog does not rebound as expected. The reduction was attributed to timing delays in job awards, mix changes, and lower steel prices, which could impact future revenue and earnings.
  
• Lower realized selling prices due to decreased raw material costs could signal price volatility affecting future revenue streams and compressing profit margins, if costs do not remain aligned with selling prices.
  
• The high interest rate environment has had a negative impact on the commercial construction portion of the Precast business, leading to lower demand and margin compression. Even though rates are expected to decline, the timing is uncertain and could affect nonresidential revenue and earnings in the near term.
  
• Although significant investment is being made to promote organic growth and expand capacity, there are inherent risks in strategic M&A activities and capital expenditures. Integration challenges or poor acquisition choices could negatively impact future net margins and return on investment.
  
• Steel Pressure Pipe segment faces risks related to production levels and capacity utilization; any adverse changes could reduce overhead absorption benefits and negatively impact margins. Furthermore, if predicted demand does not materialize, it could impact long-term earnings stability.

Valuation

• The analysts have a consensus price target of $54.67 for Northwest Pipe based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $504.2 million, earnings will come to $35.9 million, and it would be trading on a PE ratio of 19.0x, assuming you use a discount rate of 7.6%.
• Given the current share price of $52.15, the analyst's price target of $54.67 is 4.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.