As you might expect, a Buffett-Munger company reflects the stock-picking tactics of Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio), the genius gurus behind Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial). Put in the simple terms used by Buffett, it refers to a wonderful company at a fair price.
Just 18 of the many thousands of publicly-traded stocks have a place on this GuruFocus-developed screener, the latest being MYR Group Inc. (MYR, Financial), an electrical construction holding company.
The screener has four criteria:
- A high predictability rank.
- Competitive advantages, or, as Buffett refers to them, moats.
- Little or no debt incurred while growing the business.
- Valuation: fair or undervalued, based on the PEG or PEPG ratio.
How does MYR stack up in relation to these criteria?
About MYR Group
On its website, the company calls itself a holding company of specialized electrical contractors. More specifically, they are contractors who provide large-scale, electrical construction services in the U.S. and western Canada.
Also according to MYR, it has been "consistently" recognized as one of the top five specialty electrical contracting companies by an industry publication. That's backed up by being included on Fortune magazine's 100 Fastest-Growing Companies for 2020.
Based in Henderson, Colorado, the company has roots going back to 1891. Its current configuration arises out of a merger of specialty contractors in 1995. The list of services listed in the 10-K for 2020 includes: "design, engineering, procurement, construction, upgrade, maintenance and repair services, with a particular focus on construction, maintenance and repair."
It operates with two segments: Transmission and Distribution ("T&D") and Commercial and Industrial ("C&I"). In the T&D segment, the company generally serves as a prime contractor to electrical utilities, while in the C&I segment, it usually provides electric construction and maintenance services as a subcontractor to general contractors.
MYR reports both segments operate in highly competitive markets, with competition based mainly on price and reputation (the latter includes safety, quality and reliability). It adds that although customers weigh a number of factors, most contacts are awarded on the basis of competitive bidding.
In the T&D segment, it names its main competitors as Asplundh Construction Corp., Davis H. Elliot Company Inc., Henkels & McCoy Inc., MasTec Inc. (MTZ, Financial), Michels Corp., Pike Corp., Power Line Services Inc., Primoris Services Corp. (PRM, Financial) and Quanta Services Inc. (PWR, Financial).
For the C&I segment, the competition comes mainly from local and regional players, as well as from subsidiaries of national companies. Since there are few significant barriers to entry to this segment, many small companies are also competitors.
As for competitive advantages, MYR appears to have at least a few of them. First, it is one of the biggest electrical contracting organizations. Second, the company is made up of subsidiaries that are brand names in the industry. Third, as a publicly traded company, it has access good access to financing.
There are numerous risks of which investors should be aware:
- This is a construction company, and the volume and value of construction work fluctuate with the broader economy. As it points out in its 10-K, changes in the energy market also cause variation in demand, and many of its customers finance their projects with borrowed or issued capital. Thus, a change in those circumstances can also hurt MYR and its peers.
- Business and operating risks also exist, including the ability to attract and keep qualified employees (which can be more difficult in a cyclical industry).
- Third-party partner risks exist in the form of dependence on suppliers, subcontractors and equipment manufacturers.
MYR reported its fourth-quarter and 2020 full-year results on March 3. For the full year, it reported:
- Record revenue of $2.25 billion, an increase of 8.5% over 2019. This was the sixth consecutive year for increases in revenue.
- The T&D segment contributed revenue of $1.15 billion and the C&I segment contributed $1.09 billion. The latter showed an increase of 16.7%, mainly because of the acquisition of CSI Electrical Contractors Inc. in 2019.
- Gross margin increased to 12.3% from 10.3%, mostly due to an increase in higher-margin and storm-related work.
- Net income was $58.8 million, or $3.48 per diluted share, up from $37.7 million, or $2.26 per share, in 2019.
- Ebitda was 5.9% of revenue, compared to 4.9% of revenue in 2019.
- A "strong" backlog of $1.65 billion on the books at year's end.
The company did not offer guidance or an outlook for 2021.
This refers to the consistency of revenue and earnings growth, and since the market doesn't like surprises, this consistency or predictability is favored by many investors.
MYR receives a rating of four out of five for predictability, meaning it is in the top tier.
Since 2016, MYR has significantly increased its leverage:
That borrowed money (plus internal funds) made it possible for the company to make several important acquisitions:
- 2015: E.S. Boulos Company and High Country Line Construction.
- 2016: Western Pacific Enterprises Ltd.
- 2018: Huen Electric.
- 2019: CSI Electrical Contractors.
The company remains comfortably able to handle the interest costs; its interest coverage ratio is 18.35, meaning it has enough operating income to cover its interest expenses more than 18 times over.
Although its margins are narrow, the company has been able to generate a solid, double-digit return on equity.
The growth metrics for revenue, Ebitda and earnings per share are all good news for investors and, in particular, its three-year average of earnings before non-recurring items.
Dividends and share repurchases
MYR does not pay a dividend, which is in keeping with its growth orientation, and especially its growth-though-acquisition strategy.
After seriously reducing its share count midway through the past decade, the company has allowed the count to rise slightly in the past few years:
With a 10-year chart that looks like this, investors need to be cautious:
So, not surprisingly, the GF Value Chart comes in with a significantly overvalued rating:
The price-earnings ratio also shows overvaluation, but not so dramatically. The price-earnings ratio is 21.01, which is higher than the construction industry's 10-year median of 16.07.
According to the PEG ratio, which is the price-earnings ratio divided by the average five-year Ebitda growth rate, the stock is modestly overvalued. This ratio shows the price-earnings ratio within the context of growth in earnings, and it is the single metric of its kind used by the screener.
For more context, consider the acquisitions over the past five years, all of which increased the top and bottom lines.
The discounted cash flow calculator also finds MYR to be overvalued, based on four-star predictability:
All metrics considered, it would make sense to consider the company to be somewhere between modestly and significantly overvalued.
The gurus have been net sellers of MYR since the first quarter of last year:
Note that the selling began as the price began to surge last year, suggesting some profit-taking.
Five of the gurus continue to hold positions; the three largest at the end of 2020 were:
- Chuck Royce (Trades, Portfolio) of Royce Investment Partners. After reducing his position by 30.01% in the fourth quarter, he held 177,732 shares. That represented 1.06% of MYR's float and 0.09% of his total assets.
- Third Avenue Management (Trades, Portfolio) with 126,566 shares after a reduction of 58.36%.
- Jeremy Grantham (Trades, Portfolio) of GMO LLC, who was adding rather than subtracting. He increased his stake by 79.64% to finish the quarter and year with 70,600 shares.
Where does MYR Group stand in relation to the Buffett-Munger criteria? Overall, it does well, and specifically, it has a high predictability rating, it has competitive advantages, it has a debt load but it also loaded up on new assets at the same time and is fairly valued based on the PEG ratio.
Valuation will be a challenge for many potential investors. At best, we can say it is modestly overvalued, which means there is no margin of safety and a steeper wall to climb for an investor who buys at the current price.
Value investors will likely pass on MYR, given there is no margin of safety and income investors will have no interest in a stock with no dividend. On the other hand, growth investors who expect further growth in the company and industry might wish to take a closer look.
Disclosure: I do not own shares in any of the companies named in this article and do not expect to buy any in the next 72 hours.
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