Arcadis (ARCAD) is a global engineering and consulting firm, headquartered in the Netherlands, that works on projects from the U.S. to China, Dubai and Brazil. The firm has the capability to tackle the most daunting and complex of projects and differentiates itself from local firms by the depth of its organization and its global reach. A somewhat comparable U.S. competitor is Tetra Tech (TTEK). One of Arcadis' projects is the world’s largest hurricane storm damage risk-reduction system, located in New Orleans, which is pictured below:
It is an enormous installation powered by 11 huge pumps with a 5,400-horsepower diesel engine weighing 70 tons.
The company is led by CEO Neil McArthur, who previously worked at Booz Allen Hamilton (BAH) and Royal Dutch Shell (RDS.A)(RDS.B). Executive's incentive fee, which is significant in relation to the basic salary, depends for 75% on financial goals being met. The exact criteria are dependent on each executive's responsibilities, but both the chairman and board members are incentivized to deliver organic growth. In addition the CFO is incentivized to increase FCF. Most top executives benefit from increasing EPS. There is also a minimum operating profit margin of 9%, excluding takeovers, that needs to be met or no bonus pay will be awarded. Finally shares are locked for at least a year.
An ownership culture is pervasive throughout the company with each employee allowed to buy up to ~$450 worth of shares each month at a 20% discount to market prices through a special program. These shares are also locked up for at least one year. This incentivizes employees to buy shares, and the company is 15% employee-owned. People own shares, not just people at the top, but at all layers of the company.
The market is pretty down on the company because it is active in both Brazil and China. Both markets went from boom to bust. On top of that, the Brazilian police are investigating the possible misuse of funds at the $6.4 billion water management project São Francisco, where Arcadis acted as a manager for the project in a 50/50 joint venture with Brazil’s Concremat. Neither firm performed construction activities. It is not clear yet whether Arcadis will be targeted in the investigation, but it is cooperating with the police as part of the investigation.
Dutch investors already had to cope with a record fine of $240 million for marine engineering firm SBM Offshore, active in Brazil, earlier this year. SBM Offshore’s share price cratered because of the scandal and the weakness in oil and investors are not eager to hold Arcadis and go for a repeat of a similar disaster.
So far no Arcadis employees have been arrested. The water project is only worth about $35 million to Arcadis. The mean estimate by analysts for 2016 is the company will earn about $2.2 per share. The company has almost $200 million in cash on the balance sheet, which is close to covering the record fine SBM Offshore was hit with. Meanwhile the company isn’t as levered as engineering firm disasters from the Netherlands like the aforementioned SBM Offshore and Imtech. Debt sits below $550 million with maturities spread out over the next four years.
It's possibly a great time to pick up Arcadis shares for the long term at less than 10x consensus 2016 earnings. The market could be exaggerating the impact of the corruption probe, while the company has a long term record of achieving excellent growth, increasing EPS and a healthy culture of employee ownership. It very rarely traded at 10x forward earnings in the past or at such a low EV to Ebitda multiple.
Disclosure: Long Arcadis.
