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This is written with serious investors in mind, though sometimes they're just drafts in progress. I'm a former reporter, private investigator and institutional equity analyst who digs deep to find niche undervalued and undiscovered securities. I manage money for individuals, institutions and family offices via my business Long Cast Advisers. This blog is part decision-diary, part investment observations and part general musings about Philadelphia sports. It should not be viewed as a solicitation for business or a recommendation to buy or sell securities.

Saturday, July 11, 2015

$STRL: $59M project win, CFO transition and a new chief estimator ($TPC, $PRIM)

One of the WORST aspects of investing in heavy civil contractors is the influence of weather on quarterly results and the risk of a major blow up on a large project. These negatives can be offset over the long term with a wide portfolio of projects and good management. Most investors in the industry know that the time to buy a good contractor is when they are distressed and there is a pathway to a recovery, as I believe is the case here with $STRL.

One of the GREAT aspects of investing in heavy civil contractors is the visibility into project wins and project progress, and this provides visibility into both earnings and cash flow and a critical way to verify if mgmt is upfront with investors.

On the aspect of visibility and specific to STRL, two large state departments of transportation - TX-DOT and CalTrans - comprised ~50% of the company's backlog at year end 2014. Knowing this, it is not difficult to track low bid results or awards for the two customers that contribute half of the company's backlog.

Texas, July low bids >> http://goo.gl/Aky345
CalTrans Awards to Myers & Sons (STRL has a 50% ownership stake) >> http://goo.gl/70WqkG (search "Myers" or leave blank and you can find every award to every contractor over the last few years)

As the Texas link shows, last week STRL was the low bid on contract # 07153202, a $59M award to widen 39 miles of road from 4 to 6 lanes in Navarro County, TX. The project is expected to take 779 days. It hasn't been awarded yet - it still requires the county commissioner to sign off - and so the company won't press release it, but high quality low bidders are typically awarded the contract.

Another note to point out on this low bid is that STRL's bid was only 4.5% below the next bidder; there is no "winner's curse" here. And a final note, with the contract number in hand, we can follow progress on the project over the next two years. This is visibility. 

To add some add'l color on TX-DOT ... using Google's "advanced search" tool and searching the domain where TX-DOT hosts the low bid figures, we can search "Sterling Delaware" and see all the low bids they did not win >> https://goo.gl/IIvJN2 (download the top file).

This information is useful to see where they are bidding, who won, by how much, and how close they were. B/c there is a huge aspect to game theory in large project construction bidding you can learn a lot from the bids based on their distribution: who is hungry to win (an outlier below all the others), what the bidding environment looks like (everyone bidding below the estimate) and if there are new entrants for bids on large projects (the same 10 names show up most of the time). It's quite a fascinating process in my opinion and it's the front line to billions of dollars in public construction spending every year. There is money to be made mining this data far beyond our little process here.

What we learn from this "advanced search" is that in July 2015, STRL bid on but did NOT win two other large projects; an $89M estimated project on the same road, won be Webber at 19% below the estimate (!!), and a $28M project in Bexar just barely won by Sundt.

Webber is a subsidiary of the Spanish contractor Ferrovial. On $TPC's last conference call here's what CEO Ron Tutor said about competition ... "We find the Europeans are bidding everything of consequence. Let me be shared upon [sic] and say I don't believe they are doing very well here, I believe they will continue to do poorly because they don't operate like we or our U.S. peers do. This is a competitively bid hard money market where you have to work for a fixed price. And the Spanish have been the most aggressive for all the wrong reasons but they will continue to pay the price for that aggressiveness. We on the other hand do not operate by reducing our margins. I tend to think of major civil jobs as like buses, you miss one or two buses, there is always a third one behind it." Great analogy.

Moving onto the CalTrans link, we see that Myers has been awarded a handful of small sub-$5M contracts in 2015. Not much to write about there.

So on this survey of just two major clients, there's roughly $70M in low bids or new awards in 2015. Not shabby, particularly in an environment where they are prioritizing margins over revenues.

But even outside of the large DOT programs, the company is focusing efforts to expand city work (Houston, Dallas and San Antonio), port work (Port of Houston and elsewhere, with expected benefits from the Panama Canal expansion), Joint Ventures (where they are a sub on a large team) and finally, surety work, where they replace a contractor that defaults on a large project and are paid by the surety to complete projects typically at a high margin and low risk.

A lot to learn watching the bids.

On the CFO front, the company put out a press release a week or two back about a CFO transition. Normally a CFO transition is a red flag but this as a hugely positive opportunity for a solid upgrade. The prior CFO had very limited experience in construction accounting - most of his experience had been in the materials side - so he wasn't strong on the ins-and-outs of POC (percentage of completion) accounting, which is used by construction companies.

Nor was he a master of the two critical components of construction company working capital, billings in excess of costs (ie deferred revenues) and costs in excess of billings (ie unbilled receivables). A construction company CFO needs to be well versed in these things. I am quite sure the next one will be and that will add value to executives and investors as well.

On the final aspect of this note, it appears that the company has just hired away from James Construction (a subsidiary of $PRIM) a Sr. Estimator to be their new Chief Estimator >> https://goo.gl/bbV3v8. Good ones are hard to find. Am still trying to determine if this guy has his chops but his background at $GVA, $TPC and elsewhere speaks to a successful history in the business.

At end of 1Q15 STRL had ~$4.50 in asset value (PPE + working capital - net debt) vs a market cap at last check of $3.95. With positive changes happening at the company, I believe I'm scaling the learning curve on portfolio mgmt - not the CAPM one they teach in business school, nor the undifferentiated diversified strategy of buying an ETF with 1,400 companies in it - but the one where you put your money behind your best ideas.

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All rights reserved and copyrighted by Long Cast Advisers, LLC. This is not a solicitation for business or a recommendation to buy or sell securities. I own shares of STRL.

1 comment:

  1. Just as an aside, I think 2Q is going to suck. Bad spring weather in Texas, still running off old projects, etc. This is a long term turnaround. But on the day of the Russell rebalancing 2M shares traded on an up day, so there are others out there gaining interest and are patiently awaiting the process.