Traditional Oil Projects Will Struggle As Renewables Offer Slight Relief

Key Takeaways

• Shrinking demand for fossil fuel projects and a declining backlog point to increased revenue volatility as the company pivots toward renewables and faces uncertain new bookings.
  
• Labor shortages, regulatory hurdles, and reliance on large fixed-price contracts elevate project execution risks and threaten margins amid industry competition and shifting market dynamics.
  
• Strong demand in utilities, renewables, and power delivery, coupled with margin gains and robust backlog, positions Primoris for stable long-term growth and reduced revenue risk.

Catalysts

Provides infrastructure services primarily in the United States and Canada.

• The rapid expansion of renewable energy, while a pillar of recent growth, could continue to accelerate the decline in demand for traditional oil and gas infrastructure, meaning any ongoing legacy fossil fuel business for Primoris may face further revenue contractions over the next several years as project mix shifts away from higher-volume core segments.
  
• Persistently escalating labor shortages in the skilled trades, coupled with demographic trends and limited interest in construction careers, are likely to drive up project costs, introduce frequent delays, and ultimately pressure gross margins, especially as the company attempts to meet rising demand in transmission, distribution, and renewables.
  
• Increased regulatory complexity tied to decarbonization initiatives and tighter environmental standards could substantially raise compliance costs and introduce additional risks of project delays or cancellations, reducing long-term profitability and weighing on net margins in fossil-fuel related projects and even new-build renewables with imported components.
  
• The company's backlog has begun to decline, with a notable $567 million decrease in the Energy segment, indicating potential softness in near-term demand and a vulnerability to future revenue volatility if bookings do not accelerate as expected or if macroeconomic or policy uncertainty persists beyond 2025.
  
• High dependence on large, fixed-price EPC contracts in a highly competitive and consolidating industry raises the risk of significant cost overruns, unexpected losses, and earnings volatility should supply chain disruptions, inflation on critical materials, or permitting delays materialize across multi-year projects.

Primoris Services Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Primoris Services compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Primoris Services's revenue will grow by 5.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.1% today to 4.0% in 3 years time.
• The bearish analysts expect earnings to reach $305.0 million (and earnings per share of $5.61) by about July 2028, up from $206.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.0x on those 2028 earnings, down from 23.5x today. This future PE is lower than the current PE for the US Construction industry at 33.6x.
• Analysts expect the number of shares outstanding to grow by 0.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

Primoris Services Future Earnings Per Share Growth

Risks

• Sustained growth in utilities, power delivery, and renewables, including robust double-digit revenue gains and a multi-year backlog, suggests ongoing demand and revenue stability, which could underpin higher share prices in the coming years.
  
• The company reports accelerating margin improvements, especially in its Utilities segment, supported by contract renewals at higher rates and efficiency gains, which are likely to result in higher net margins and earnings.
  
• Strong backlog visibility-already booking 40 to 50 percent of 2026 work and confident in filling 2026 and part of 2027 by year-end-indicates long-term revenue visibility that could reduce risk of future revenue declines.
  
• Increasing demand for grid resiliency, electrification, and data center power solutions is driving new project awards across North America, pointing to Primoris being well positioned to benefit from long-term secular infrastructure spending and supporting top-line growth.
  
• A disciplined M&A strategy and significant balance sheet liquidity enable ongoing investment in high-growth end-markets like renewables and power delivery, which may support further margin expansion and earnings growth over the long term.

Valuation

• The assumed bearish price target for Primoris Services is $70.16, which represents two standard deviations below the consensus price target of $93.8. This valuation is based on what can be assumed as the expectations of Primoris Services's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $110.0, and the most bearish reporting a price target of just $67.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $7.7 billion, earnings will come to $305.0 million, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 8.1%.
• Given the current share price of $89.66, the bearish analyst price target of $70.16 is 27.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.