NV5 Global Inc. (NVEE, Financial) is one of the fastest-growing engineering consultancy companies, offering its services across a wide spectrum of industries, including energy, real estate, infrastructure and environmental solutions.
After growing consistently over the past five years, the stock recently witnessed its first genuine crash in mid-November. The selloff did not stop, even after the company announced reasonably good third-quarter results. The management reported a 14% increase in revenues, including 8% organic growth, 10% growth in earnings before interest, taxes, depreciation and amortization and 23% growth in net income versus the previous year. There is no sign of a reversal in the movement of the stock price, however. Given this background, it is interesting to analyze the company’s position from a long-term perspective.
Since its listing, NV5 Global has provided phenomenal returns to its shareholders via capital appreciation. The company has seen its revenues grow more than fivefold and the stock has appreciated almost 10 times, making it a favorite among growth investors. As we can see in the chart, the price appreciation has been synchronizing with the revenue and earnings per share numbers. This appreciation has been so rapid that despite the recent crash, the company continues to trade at higher valuation multiples as compared to peers.
Acquisition-based expansion strategy coupled with good organic growth
NV5 Global is known for its strategy of expansion through acquisitions. Some of its most recent acquisitions include CALYX Engineers,which is focused on infrastructure and transportation, and CHI Engineering Services, which is focused on energy services, particularly natural gas. The core competence of the management team, led by Chairman and CEO Dickerson Wright, is to rapidly acquire and integrate engineering consultancies into NV5 Global’s business, which is not an easy task.
Manpower-based businesses like engineering consultancy have a major problem of hierarchy design and management as a post-merger integration issue, but clearly NV5 Global has been successfully handling this without losing clients. Apart from its inorganic growth story, the company has also been successful in acquiring $28 million worth of fire mitigation contracts, $17 million worth of location and survey contracts and $25 million worth of natural gas contracts in November alone. The margins have also shown a significant improvement over the years and it can be safely concluded that the management is on track in regard to business expansion.
High relative valuation and volatility for a fundamentally strong company
With a GuruFocus financial strength rating of 8 out of 10 and a profitability and growth rating of 7 out of 10, NV5 Global has all the makings of a fundamentally solid growth stock. The company has seen its operating margin grow to 8.53% and its net margin rise as high as 7.74%, beating many of its industry peers.
With a return on invested capital of 13.59% and a return on equity of 14.85%, management has been successful in creating value for shareholders. It has also produced a double-digit three-year revenue growth rate of 16.8% and a three-year EBITDA growth rate of 26.3%. NV5's capital structure is rock solid, with debt accounting for about 11% of equity and a cash-to-debt ratio of 1.69.
As tempting as the fundamentals may appear, the valuation metrics of NV5 Global are certainly on the higher side. The stock is trading with a price-earnings ratio of 24.95, which is high for the engineering consultancy industry. A point worth highlighting is that the company's EV-to-Revenue multiple is higher than some of its significantly larger competitors like Fluor Corp. (FLR, Financial) and Jacobs Engineering (JEC, Financial). All these companies are trading at a multiple below 1, but NV5 Global is at 2.12. The stock also has a relatively high beta of 1.5 and is strongly affected by the broader market sentiment, which is why the recent crash in the price was so sharp.
Conclusion
NV5 Global is a fundamentally strong company that is expected to experience good growth in the engineering consultancy industry. With its current level of valuation, however, it is doubtful whether the stock has the potential to give the same kind of multibagger returns that it has provided investors since its listing about five years ago. The stock is certainly worth holding, but new investors should be aware of the high valuation multiples before making an entry at current levels.
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