Utility Infrastructure Backlog And Data Center Demand Will Support Long Term Earnings Expansion

Catalysts

About Centuri Holdings

Centuri Holdings provides utility infrastructure and energy transition services across gas and electric distribution, transmission and related industrial projects in North America.

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

• Record backlog of approximately $5.9 billion and a robust $13 billion opportunity pipeline, including over 600 strategic bids, supports sustained revenue growth by converting awarded work into a higher, more stable top line.
• Growing utility infrastructure investment tied to regulatory-driven gas pipeline replacement, such as PHMSA Gas Mega Rule projects, is expanding high-visibility, multi-year workloads that may support steady revenue expansion and structurally higher base earnings.
• Rising demand for power-intensive facilities, including sizable data center campus projects and renewable natural gas systems, is shifting mix toward higher-margin, project-based electric and industrial work, which can affect consolidated gross margin and EBITDA over time.
• Expansion and renewal of gas and electric MSA contracts across North America, including significant incremental awards in the Midwest, Southeast and Northeast, increases recurring volumes and improves asset utilization, which may influence net margins and earnings stability through the cycle.
• Operational initiatives, such as fleet optimization, improved contract management and ramping productivity on new MSAs, are designed to boost efficiency, reduce capital intensity and support margin recovery, which could translate into changes in free cash flow generation and net income as volumes scale.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Centuri Holdings's revenue will grow by 9.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.1% today to 3.3% in 3 years time.
• Analysts expect earnings to reach $123.6 million (and earnings per share of $1.46) by about December 2028, up from $2.5 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $138.3 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 23.1x on those 2028 earnings, down from 1000.2x today. This future PE is lower than the current PE for the US Construction industry at 34.5x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.66%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is explicitly targeting double digit revenue growth in 2026, supported by a record backlog of 5.9 billion, 3.7 billion of bookings year to date and a 13 billion opportunity pipeline, so if this commercial momentum translates into sustained contract wins and execution, the share price could appreciate in line with rising revenue and earnings expectations.
• Management has begun to deliberately push pricing and raise bid margins, particularly on higher margin project work such as data center infrastructure and industrial projects. This could structurally lift gross margins and EBITDA and lead to faster earnings growth than the market currently discounts.
• Secular drivers, such as accelerating utility infrastructure investment, PHMSA Gas Mega Rule driven pipeline replacement and the build out of power intensive data centers and renewable natural gas systems, provide multi year demand visibility. This may underpin sustained top line expansion and progressively higher base net income.
• Operational initiatives, including fleet optimization, improved contract management, better utilization of a growing workforce and efforts to reduce seasonality in the gas business, are aimed at improving efficiency and capital intensity. Over time this could enhance free cash flow and support deleveraging, potentially warranting a higher equity valuation multiple.
• The company is refinancing and terming out its debt while expecting the net debt to adjusted EBITDA ratio to decline from 3.8 times to around 3.3 to 3.4 times with stronger fourth quarter free cash flow. If this trajectory of improving leverage and balance sheet strength continues alongside earnings growth, equity risk may fall and support a higher share price.

Valuation

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

• The analysts have a consensus price target of $24.33 for Centuri Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $28.0, and the most bearish reporting a price target of just $20.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $3.7 billion, earnings will come to $123.6 million, and it would be trading on a PE ratio of 23.1x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of $25.25, the analyst price target of $24.33 is 3.8% lower. 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.