Goldfield is a misunderstood opportunity that has gone through a massive transformation over the past five years.  We believe the company’s true earnings power is being masked by some short-term issues and investors willing to wait 12-18 months will see shares share appreciation of 100%-150% present levels, with little risk of permanent capital loss.  This isn’t a complicated thesis with a levered balance sheet or lots of moving parts, but rather the company is completely off the radar screen.  It’s never been written up on VIC, has zero analyst coverage, and holds no conference calls or investor days.  Additionally, the company screens poorly due to some of the items we will discuss.  We believe that at present levels, permanent loss of capital is highly unlikely, and under conservative assumptions we get a stock price of 100-150% higher on a three-year forward basis.  Due to this valuation gap, coupled with some impending catalysts, we believe a majority of the appreciation will occur in the next 12 months.  

Business Summary

Goldfield is focused on the construction and maintenance of electric facilities for utility and industrial customers.  They are involved in the building of everything from high voltage transmission lines to concrete foundations for electrical substations.

The company celebrated its 106th annual meeting this year and business has morphed many times during its history.  It was originally a combination of the six richest goldmines in Nevada, becoming one of the twenty largest industrial companies in the US during the early 1900’s.  During the 60’s it became a conglomerate, aggressively growing and acquiring companies such as Frontier Airlines, General Host and The Greyhound Corporation.  From the 80’s through early 2000’s, Goldfield primarily focused on silver mines in New Mexico (Source: company website).

Today, through its subsidiaries, Goldfield is engaged in the construction of electric facilities, with a smaller business line in installation of underground fiber optic cable.  A number of recent events, outlined below, have led to the company being undervalued by the market.  We have also identified specific catalysts that will cause the market to take notice of Goldfield and re-price the stock accordingly.

Significant Recent Events

2008-2010: Goldfield was involved in the development of residential real estate on The Florida Gulf Coast.  The company substantially exited these operations in 2008 to focus on the electrical and fiber optic construction business.  The residential operation badly burned the company and investors at the time.  This led to an activist investor purchasing stock and forcing management to exit this business and focus on its current operations.

2012: The Company expanded its electrical construction business from its Florida base to the Carolinas and Texas.  Its end customers are predominately electrical utilities that are credit worthy and have long operating histories.  In 2012, they secured their largest contract in history, a $76M project with "STEC" (an Austin-based utility).

2013: The STEC contract called for the construction of a 110 mile high voltage transmission line.  This was the largest project in the company’s history.  As the project progressed, the company encountered issues with certain sub-contractors and discovered highly challenging geological formations along the construction route.  Standing steadfast in its commitment to deliver the project on-time and preserve its reputation, Goldfield enlisted additional contractors and resources at their own cost in order to close the time gap and overcome adverse conditions. These actions caused margins to contract given the cost over runs.

In addition to issues in the core business, the company received an inquiry from the Environmental Protection Agency (EPA) regarding a silver mine they owned almost 30 years ago.  There were some minor issues that had been left open since the company ceased operations,  the company worked with outside engineers and the EPA to put these issues to bed for a cost of about $1.2M. Note that while the issue has not formally been retired, the company believes it is adequately reserved for the matter and holds insurance coverage that should reimburse the company for the full amount.  While this was a significant hit to margins, it was certainly a one-time event and will not recur going forward.

2014: The first quarter of 2014 involved severe weather events for the company which led to a slowdown of work while continuing to carry the costs for the required crews.  In addition, the company made an acquisition in Q1 2014 that would allow it to compete in more geographies for electrical construction work.  Early signs show that the acquisition has been successful and has led to an immediate increase in workflow.  During the first two quarters of the year, the company also incurred significant legal expenditures associated with the acquisition which we expect to disappear going forward. Additionally, the company began to staff up in anticipation of the increased work load.  Both the costs associated with the acquisition, weather and increased hiring have led to artificially depressed margins. Yet we believe the core earning’s power of the company has been enhanced.

The Opportunity

Goldfield is misunderstood by the market on two fronts.  The first misperception is that the large STEC project was a one-time event and that revenues will decline in 2014 given its completion.  The second is that margins going forward will continue to be depressed – the assumption is based on the aforementioned one-time events that affected the company during 2013 and Q1 2014.  This double whammy had a devastating effect on the stock, cutting it by 50% over the last 18 months to a low of $1.50/share.

We believe the market is wrong on both fronts.  As stated by the company, they have already replaced the revenue from the STEC project and the recent acquisition has given them a platform for growth.  In fact, the company announced a record backlog in their Q2 earnings announcement as it grew*5x* over last year’s levels (while excluding the STEC project).  This demonstrates that they have not only replaced lost revenue, but have grown the demand for their services.  See the comments below from the CEO in their Q2 earnings announcement. This new revenue is largely driven by MSA (Master Service Agreements) contracts that provide more visibility and are more recurring in nature than project based revenue. We will need to see what the ultimate book-to-bill ratio settles at, as well as margins, but directionally the development is very positive.  

From the release:

Revenue for the three months ended June 30, 2014, increased 23% to $25.3 million from $20.6 million in the comparable prior year period. The improved electrical construction revenue was mainly attributable to several large projects in the Carolinas, Florida, and Texas, as well as additional revenue from our newly acquired subsidiary, C&C.

As previously announced the Company has been focusing on developing and growing electrical construction services under multi-year Master Service Agreements ("MSAs"), which provide for more consistent work load and improved operating efficiencies. This effort has scored significant success in the second quarter. Total MSA backlog grew five-fold to approximately $190 million as of June 30, 2014, from $31 million as of June 30, 2013. If MSA contracts awarded since July 1, 2014 were included as of June 30, 2014, the total estimated MSA backlog would be approximately $266 million.

John H. Sottile, President and Chief Executive Officer of Goldfield said, "The dramatic increase in our electrical construction MSAs attests to the strength of our operations and the success of efforts to grow that business." "This portends well for our future," Mr. Sottile added. [Q2 Earnings release]

A few comments about our first quarter 2014 results: Operating margins in the first quarter declined significantly from the same quarter in 2013. This decrease largely resulted from increases in our electrical construction operations overhead costs attributable to strengthening our supervisory personnel appropriate to our expanded operations, as well as integration expenses relating to the C&C acquisition. [Comments from Annual Meeting in May 2014]

As it pertains to margins, we believe the market does not understand that one-time costs were the primary driver of the depressed margins.  However, we understand that it was due to adverse weather conditions, increased cost on a large project, legal fees due to an acquisition, the EPA matter, and hiring ahead of current massive increase in work backlog.

The two sets of events together have presented the perfect storm to create a short-term selloff that patient investors can capitalize on.  As the company shows sustained revenue growth and improved margins, we believe we will see a rapid rerating of the stock to 100-150% above current prices.

Our calculation of Enterprise Value is shown below:

Note the company has no options outstanding.

In our valuation analysis, we looked at three different scenarios.  Our standard practice is to look at valuations on a three-year forward basis and the calculations below are our projections for Goldfield’s stock price at the end of 2017E.  Note we use pre-tax FCF multiples.

Low: In the low case, we assume zero growth and margins that struggle to recover from last year’s one-time costs.  We believe the company would warrant a pre-tax FCF multiple of 6-8x if this were the case.

High: In the high case, we assume low double-digit growth and faster margin recovery.  We believe the company would warrant a pre-tax FCF multiple of 10-12x if this were the case.

Summary

Goldfield offers ample downside protection in the form of hard assets and real estate as it has $1.22 of tangible book value per share which we thing is real.  It also provides the opportunity to more than double ones money in the next 12-18 months as normalized earnings come through.  We believe the next catalyst will be the Q3 earnings release in which we expect sustained growth in the backlog.  As the market realizes revenues have been replaced and are growing, along with margin stabilization, both profits and multiples should rebound.

Risks:

Customer concentration in the largest risk