Texas Gas And Illinois Solar Projects Will Expand Capacity

Key Takeaways

• Argan's increased project backlog and robust pipeline, driven by new contracts, signal significant revenue and earnings growth potential in energy sectors.
  
• Maintaining a strong balance sheet with strategic investments and leadership changes positions Argan to enhance operational efficiency and shareholder returns.
  
• Focus on large-scale natural gas projects and fixed-price contracts presents execution, regulatory, and cost risks, impacting revenues and margins amid supply chain volatility.

Catalysts

Through its subsidiaries, provides engineering, procurement, construction, commissioning, maintenance, project development, and technical consulting services to the power generation market in the United States, Republic of Ireland, and United Kingdom.

• Argan's project backlog has increased by 80%, reaching $1.4 billion as of January 31, 2025, due to new contracts in both natural gas and renewable energy projects. This strong backlog, along with a robust pipeline of projects, is expected to drive significant revenue growth in the upcoming years.
  
• The addition of new power projects, including a 1.2 gigawatt ultra-efficient combined-cycle gas-powered plant in Texas and a 405 megawatt solar project in Illinois, highlights Argan's capacity to meet the growing energy demand, potentially boosting revenues and earnings as these projects are executed.
  
• Argan remains optimistic about the demand environment for natural gas and renewable energy facilities, anticipating these will be core to its growth engine. This could lead to improved net margins as the company capitalizes on higher-margin gas projects amidst a favorable market environment.
  
• The appointment of a new CEO at SMC, Argan's Telecommunications Infrastructure Services division, alongside strategic investments to strengthen its workforce, positions the company to enhance operational efficiency and profitability, potentially improving net margins and earnings contributions from this segment.
  
• Argan's strategy focuses on maintaining a strong balance sheet, with $525 million in cash and no debt, combined with a continued commitment to shareholder returns through buybacks and dividend increases. This financial stability supports the company's ability to pursue growth opportunities and could lead to higher earnings per share.

Argan Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Argan's revenue will grow by 11.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.8% today to 10.8% in 3 years time.
• Analysts expect earnings to reach $130.2 million (and earnings per share of $9.28) by about April 2028, up from $85.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.9x on those 2028 earnings, down from 21.4x today. This future PE is lower than the current PE for the US Construction industry at 22.5x.
• Analysts expect the number of shares outstanding to grow by 2.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

Argan Future Earnings Per Share Growth

Risks

• The focus on large-scale projects, such as the Trumbull Energy Center and Sandow Lakes Energy Company plant, introduces execution risk, which could affect revenues and margins if the projects are delayed or over budget.
  
• With a pipeline heavily concentrated in natural gas projects, any shifts in regulatory or environmental policies against fossil fuels could impact future revenues and profitability, particularly in regions like Texas which are critical to their project plan.
  
• The high reliance on fixed-price contracts in a volatile supply chain market increases the risk of cost overruns that could compress gross margins and earnings.
  
• Delays in obtaining the final notice to proceed on significant new projects, such as the 1.2-gigawatt project in Texas, could hinder backlog conversion, affecting near-term revenue recognition and cash flow.
  
• The aging energy infrastructure and underinvestment in power facilities, while presenting opportunities, also indicate potential operational and financial risks if supply deficiencies or infrastructure failures impact project timelines and cost management.

Valuation

• The analysts have a consensus price target of $150.0 for Argan 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 2028, revenues will be $1.2 billion, earnings will come to $130.2 million, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $134.43, the analyst price target of $150.0 is 10.4% 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.