Expanding Into Data Centers In Asia And Middle East Will Drive Future Success

Key Takeaways

• Strategic focus on utilities, data centers, and digital transformation is expected to drive revenue and organic growth.
  
• Expansion of high-margin tech services and international growth aims to enhance margins and boost earnings.
  
• NV5's reliance on acquisitions for growth and rising costs pose risks to margins and earnings, with execution challenges in international markets adding further pressure.

Catalysts

Provides technology, conformity assessment, consulting solutions, and software applications in the United States and internationally.

• NV5 plans to achieve mid
• to high single-digit organic growth by focusing on key sectors such as utilities, data centers, and digital transformation, which should positively impact revenue growth.
  
• The company has initiatives underway to expand EBITDA margins by 150 basis points in 2025, focusing on optimization, utilization, productivity improvements, and reducing administrative costs—positively impacting net margins.
  
• NV5 is targeting cash flow conversion rates to rise from 40% in 2024 to 60% in 2025 through contract renegotiations and optimized billing cadence, thereby improving cash flow and potentially driving earnings growth.
  
• Strategic international expansion into regions such as Thailand, South Korea, Indonesia, and the Middle East, particularly in the data center business, is expected to drive revenue growth.
  
• NV5 is leveraging technology and expanding high-margin recurring tech services, such as those for building digitization and geospatial analytics, which are expected to drive margin expansion and earnings growth.

NV5 Global Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NV5 Global's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.0% today to 6.4% in 3 years time.
• Analysts expect earnings to reach $73.8 million (and earnings per share of $1.04) by about March 2028, up from $28.0 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 32.1x on those 2028 earnings, down from 42.6x today. This future PE is greater than the current PE for the US Professional Services industry at 21.7x.
• Analysts expect the number of shares outstanding to grow by 1.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.0%, as per the Simply Wall St company report.

NV5 Global Future Earnings Per Share Growth

Risks

• NV5's ambitious growth target of $1.6 billion in revenue by 2028 relies heavily on both organic growth and strategic acquisitions, which introduces execution risk and could impact revenue if not realized fully.
  
• Inflationary pressures on administrative and operating costs have eroded EBITDA margins, indicating a potential risk to net margins if these are not effectively controlled going forward.
  
• High unbilled receivables and associated cash flow challenges, driven by contractual billing milestones, could lead to working capital issues, impacting cash flow from operations and earnings.
  
• Increases in acquisition-related costs and intangible amortization expenses have impacted net income negatively in 2024, posing a risk to future earnings if not managed efficiently.
  
• NV5 faces competition and market risks in expanding international data center operations, where private energy development differs from US public utility models, potentially affecting revenue and earnings if market entry is not successful.

Valuation

• The analysts have a consensus price target of $28.857 for NV5 Global 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 $41.0, and the most bearish reporting a price target of just $22.0.
• 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 $73.8 million, and it would be trading on a PE ratio of 32.1x, assuming you use a discount rate of 7.0%.
• Given the current share price of $18.28, the analyst price target of $28.86 is 36.7% 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.