Further cases can be made for an investment here by pointing to the financial position and valuation of the stock. Argan is in good health, with almost $200 million in cash and no debt. The cash alone represents 72% of the company's $273 million market valuation! At just over $19, Argan stock has a Magic Formula� adjusted earnings yield of 17%, far cheaper than competitors like Fluor (FLR) or Foster Wheeler (FWLT), both at 10%. Certainly, there are worse picks than a small company trading cheaply against past earnings with a debt-free balance sheet and solid opportunities for growth.
To be clear though, this is a highly speculative stock. The main problem I have with the company is one familiar to many small-cap stocks: intense customer concentration. Gemma's backlog stands at $236 million, but 90% of it is tied to two projects: the CPV Sentinel project (an 800MW nat gas power facility in California), and a 50MW biomass-fired power plant in Texas. The CPV construction is set to finish this summer, while the Texas project completes at the end of 2014.
This means, of course, that Argan needs to start thinking about re-filling the pipeline.
To that end, Argan is taking action. It has invested around $5 million in loans to Moxie Energy to develop two gas-fired power plants right on the shale, eliminating transport costs (a logistical issue with nat gas) and supplying electricity to the crowded northeast power grid. Under the development agreement, Argan gets the right from Moxie to provide the E&C services for the plants, should they go forward. This could be a big deal for Argan - the combined capacity of the Moxie plants will be more than the combined output of Sentinel and Texas. Those two together were worth over $360 million in revenue.
At this point, it seems that both plants are in good shape to move forward. Here is an excellent recent write-up on the situation (and the company).
New awards volume beyond that are anyone's guess. The U.S. is in a period of stagnant power demand, and strapped government budgets could force them to cut wind power subsidies. Given the few available jobs, larger competitors have been aggressive on price. As such, I (and management) do not expect a lot of big new wins in the near term. But this is tough to predict.
E&C firms are always tricky to value, and Argan especially so given its tight concentration of business and numerous risk factors. Assuming the Sentinel and Texas jobs deliver as planned, and assigning a reasonably high likelihood of Moxie contributing as expected, I see Argan as worth about $20 over the long term... not much over the current stock price. We'll slap the "neutral" tag on this one