Public Water Infrastructure Funding Will Drive Sustained Earnings Power For This Undervalued Supplier

Catalysts

About NWPX Infrastructure

NWPX Infrastructure designs and manufactures engineered steel water transmission systems and precast concrete products that support large scale water and civil infrastructure projects.

What are the underlying business or industry changes driving this perspective?

• Exceptionally strong bidding calendars for large scale municipal water projects such as Red River, IPL extensions and major reliner work are building a multiyear pipeline that supports sustained high utilization at WTS plants, which should underpin continued revenue growth and structurally higher earnings.
• Targeted public funding programs for water infrastructure at both the federal level and in key states such as Texas are extending the cycle of large diameter pipeline investment, which is likely to keep backlogs elevated above historical norms and support durable expansion in segment margins.
• WTS operations have shifted from a working capital drag to a consistent cash generator through progress billing, material prepayments and tighter project controls, a structural change that should translate strong project activity into higher free cash flow conversion and rising net income over time.
• Scaling the precast product spread strategy across Park, Geneva and legacy WTS plants, supported by new equipment and cross plant certifications, is broadening the addressable market and improving fixed cost absorption, which should drive faster top line growth and margin recovery in the precast segment.
• Ongoing mix shift toward higher value, sustainability focused products, including EPD verified steel pipe that can win specification driven bids, positions NWPX to capture outsized share on environmentally scrutinized projects, enhancing pricing power, gross margins and overall earnings leverage.

Assumptions

This narrative explores a more optimistic perspective on NWPX Infrastructure compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming NWPX Infrastructure's revenue will grow by 2.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 7.0% today to 8.4% in 3 years time.
• The bullish analysts expect earnings to reach $47.2 million (and earnings per share of $4.86) by about December 2028, up from $36.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $33.8 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 17.2x on those 2028 earnings, up from 16.5x today. This future PE is lower than the current PE for the US Construction industry at 33.4x.
• The bullish analysts expect the number of shares outstanding to decline by 3.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.1%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The current record quarter in Water Transmission Systems is explicitly described by management as not a new baseline. If industry demand fails to reach the 200,000 tons per year threshold they associate with structurally higher margins, utilization could revert toward the low 80 million to 85 million revenue run rate per quarter and pressure both revenue growth and earnings over time.
• Precast margins are currently being diluted by higher depreciation from new equipment and by timing issues around shutting older lines. If nonresidential construction or residential demand at Geneva softens instead of ramping as expected, underabsorption of new capacity could keep segment margins below historic levels and weigh on consolidated net margins.
• The narrative relies heavily on long lived public funding programs such as IIJA and Texas specific initiatives to sustain a strong bidding environment. The company notes that only a small portion of earmarked federal water funds has actually been disbursed, so slower than expected allocation or political shifts could flatten the multiyear project pipeline and reduce backlog visibility, ultimately constraining revenue and EBITDA growth.
• Management is targeting operating margins of at least 10% through margin over volume discipline and cost efficiencies. However, SG&A has been rising with compensation and bonus expense and may be pushed higher by future M&A or continued inflation, which could offset gross margin gains and cap operating income expansion even if top line continues to grow.
• The strategy to grow through precast product spread and acquisitions increases capital intensity via elevated CapEx and potential deal making. If integration is slower than planned or new locations fail to reach the planned roughly 100 million top line scale, returns on invested capital could lag expectations and constrain free cash flow and earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for NWPX Infrastructure is $72.0, which represents up to two standard deviations above the consensus price target of $64.0. This valuation is based on what can be assumed as the expectations of NWPX Infrastructure's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $72.0, and the most bearish reporting a price target of just $50.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $563.6 million, earnings will come to $47.2 million, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $62.83, the analyst price target of $72.0 is 12.7% higher.
  
• 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.