Description

Goldfield Corp (GV $4.90) is a Florida based electrical construction company operating from the Carolinas to Florida to Texas.  GV is beginning to benefit from the billions of dollars its customers are spending to harden their transmission networks against the kind of storms that have affected Florida and Texas in the last 30 days.  These storms, Harvey and Irma, will cause an immediate and long-term bump in revenues and earnings.  I believe GV can hit a $9 share price in early 2018 due to the economic benefits from this trend.

GV’s largest customers, Duke Energy and Florida Power and Light, have announced multi-billion spending plans to upgrade and harden their transmission and distribution networks.  This will lead to GV, assuming it gets its fair share of contracts, to have significant growth over the medium and long-term.

Business Description

Goldfield has been around over 100 years.  There was a write up by chuplin1065 on September 25, 2014 on the VIC which described GV and its history.  Today GV is mainly focused on constructing electrical infrastructure for utility and industrial customers.  It typically works under long-term Master Service Agreements (“MSA”) for its utility customers.  These agreements run three to five years and represent most of the backlog that the Company reports.  GV’s niche jobs tend to be under $5 million and are typically issued under the MSA it has with each customer.  GV’s main customers are:

1. Santee Cooper (South Carolina Public Service Authority)

2. Florida Power and Light Company

3. CPS Energy

4. Lower Colorado River Authority

5. Central Electric Power Cooperative, Inc.

6. Duke Energy

7. Orlando Utilities Commission

8. Lee County Cooperative

Historically, a significant portion of GV’s revenues has come from several different customers each year. Its top three customers represented 58% of revenues for 2016.  This concentration is not problematic as utilities find it cheaper and more flexible to outsource these jobs to third parties than to have additional staff on hand.

Goldfield has three subsidiaries doing electrical construction.  They are Power Corporation of America (“PCA”), Southeast Power (“SP”) and C&C.  SP and C&C operate under PCA which is headquartered in Port Orange near Daytona Beach on the east coast of Florida.  SP is headquartered in Titusville, Florida and C&C is headquartered in Jacksonville, Florida.  The Company has additional locations in Bastrop, Texas and Spartanburg, South Carolina.

GV’s construction jobs are customarily performed according to plans and specifications provided by its customers.  GV supplies the management, labor, equipment, and tools, while the customers generally supply most of the required materials except for the construction of concrete foundations.  The Company’s contracts are usually on the basis of competitive bidding or pursuant to an MSA.  GV reports a backlog, however it can change drastically as a MSA agreement rolls on or off.  Therefore, backlog is not an effective means of projecting GV’s revenues.  

Hurricanes Irma and Harvey have caused the disruption of power to millions of homes in GV’s service areas.  The estimate for the southeast and Texas is about 12 million and 1 million homes, respectively.  This will provide a near term boost for revenues and profits at GV, as its utility customers do not have the manpower to restore service in a timely fashion without relying on outsourcing the repair work.  This type of work is high margin and will aid third and fourth quarter earnings for 2017.

Goldfield also has a small subsidiary that builds beachfront developments on the east coast of Florida around its headquarters of Melbourne.  This business contributes pretax earnings of about $1 million per year.  It is not core to what GV does and is immaterial to the discussion about the Company.

Valuation and Projections

There are four public comparable Electrical Construction companies which trade at an average of 8.5 times trailing and 7.3 times forward EV/EBITDA and at a 21.5 P/E ratio.  These companies are much larger than GV and operate at significantly lower gross and operating margins.  These larger companies focus on the largest and most competitive contracts.  GV by contrast mostly bids on jobs below $20 million and are sometimes the only bidder on smaller jobs.  The Company relies on being very responsive to its customers’ needs and delivering high quality work.  As GV grows into a larger multi-state electrical contractor, it should be very attractive to one of the larger players for its niche business.  The table below shows the comparable company valuations.

Please note, to calculate the enterprise value of GV I have counted the land development subsidiary as cash.  The understatement of the value of this asset is offset by using an EBITDA and/or P/E multiple which counts this subsidiary’s cash flow.  I believe that this method properly values this asset and is largely inconsequential to the overall discussion of GV’s ultimate worth.

As of the close of trading 9/11/2017 GV traded at 4.6 times trailing and 4.3 times forward EV/EBITDA and P/E ratio of 12.4.  These multiples represent nearly 50% discounts to the trading multiples in the sector.  While GV is a nano-capitalization stock, it has better margins and growth prospects than its peers.  Using a 7x EV/EBITDA multiple or a 19x P/E ratio yields a share price of about $9 per share this year and $10 per share in 2019.  The benefit from the major storm repairs makes this opportunity a near-term play with a large margin of safety due to GV’s strong balance sheet.  My projections and calculations of share price are shown in the table below. I believe the revenue growth rates are conservative based on the multi-billion dollar spending plans of its largest customers and the extensive damage from Harvey and Irma.

Catalyst

1.  Immeadiate revenue gains from hurricanes Harvey and Irma.

2.  Long term growth from multi-billion spending plans of its customers to upgrade and harden electrical transmission networks in the its territories.

3.  Acquisition by a larger electrial construction company looking to take advantage of GV's high margin business.