Author Note: This post was written more than two weeks ago. On Tuesday, March 6, the company announced earnings which largely beat expectations. As a result, the stock has gained ~29% since then. Unfortunately, I was waiting for it to get a bit cheaper. Sometimes when you snooze, you lose.
Ecology and Environment Inc (EEI, Financial) is an environmental consulting firm with 1,100 employees worldwide. It has completed 50,000 projects in 96 countries over the past forty years. Given the role that reputation plays in environmental and other consulting, this track record is both impressive and serves as a barrier to entry for smaller newcomers.
EEI trades at a P/E ex-cash of ~10.7x, so not quite as cheap as many of the companies I feature (though, still extremely low compared to so-called “value” ETFs which have average P/Es of 17… but I digress). It has a five year average ROE of 10%. Also, as you would expect from a consulting company, it has relatively low capital demands, with the majority of its capex being growth capex rather than maintenance capex (keep in mind, EEI increased revenues from $90-100m/year before the recession to $140+m over the last two years, and is on track to do even better this year). This has allowed the company to generate decent FCFFs.
EEI has very little debt (less than $2m) and a large cash balance (nearly $14m). Consequently, liquidity is not an issue. The company also has a fairly variable cost structure, as shown by its relatively stable operating margin (stdev of just 0.8% over the last 5 years). This is due to the fact that many of the company’s contracts are cost-plus, meaning that the company earns a set rate above the actual costs incurred for completing the contract. This has the added benefit of allowing the company to flow through inflation.
One drawback is that the company has a dual class share structure, whereby insiders own 70% of the Class B supervoting shares (10x the voting power of Class A shares). I am not a fan of this, but at the very least, we can be assured that insiders have a vested interest in seeing the company do well.
The company pays a dividend, which is nice, though the rate isn’t as high as I’d like to see. The company has had share repurchase programs in the past, but generally of nominal size.
Also, for those worried about the US fiscal situation, you might want to pass, as 1/3 of the company’s revenues are derived from the various levels of the US government. One mitigating factor is that some of these contracts have long durations.
EEI appears quite stable, and I have calculated an EPV in the high teens (if evaluating yourself, keep in mind the large minority interest), so I am waiting for it to get cheaper.
Author Disclosure: No position, but I may initiate in the next 72 hours.
Talk to Frank about Ecology and Environment, Inc.
Ecology and Environment Inc (EEI, Financial) is an environmental consulting firm with 1,100 employees worldwide. It has completed 50,000 projects in 96 countries over the past forty years. Given the role that reputation plays in environmental and other consulting, this track record is both impressive and serves as a barrier to entry for smaller newcomers.
EEI trades at a P/E ex-cash of ~10.7x, so not quite as cheap as many of the companies I feature (though, still extremely low compared to so-called “value” ETFs which have average P/Es of 17… but I digress). It has a five year average ROE of 10%. Also, as you would expect from a consulting company, it has relatively low capital demands, with the majority of its capex being growth capex rather than maintenance capex (keep in mind, EEI increased revenues from $90-100m/year before the recession to $140+m over the last two years, and is on track to do even better this year). This has allowed the company to generate decent FCFFs.
EEI has very little debt (less than $2m) and a large cash balance (nearly $14m). Consequently, liquidity is not an issue. The company also has a fairly variable cost structure, as shown by its relatively stable operating margin (stdev of just 0.8% over the last 5 years). This is due to the fact that many of the company’s contracts are cost-plus, meaning that the company earns a set rate above the actual costs incurred for completing the contract. This has the added benefit of allowing the company to flow through inflation.
One drawback is that the company has a dual class share structure, whereby insiders own 70% of the Class B supervoting shares (10x the voting power of Class A shares). I am not a fan of this, but at the very least, we can be assured that insiders have a vested interest in seeing the company do well.
The company pays a dividend, which is nice, though the rate isn’t as high as I’d like to see. The company has had share repurchase programs in the past, but generally of nominal size.
Also, for those worried about the US fiscal situation, you might want to pass, as 1/3 of the company’s revenues are derived from the various levels of the US government. One mitigating factor is that some of these contracts have long durations.
EEI appears quite stable, and I have calculated an EPV in the high teens (if evaluating yourself, keep in mind the large minority interest), so I am waiting for it to get cheaper.
Author Disclosure: No position, but I may initiate in the next 72 hours.
Talk to Frank about Ecology and Environment, Inc.
