The weak economy is holding back the industry's development. Electricity demand is predicted to expand 2x the rate of GDP growth under normal circumstances. Since 2008 demand has climbed but growth has been below the long term trend line. New construction has been driven primarily by expiring subsidies and replacement needs. Argan encounters stiff competition under the current scenario. Many contractors underbid projects to keep their own teams working. But they don't pay their subcontactors. Argan has a great record. But a major acceleration is unlikely until the industry's economics recover.
Backlog stood at $415 million as of January 31st. That was reduced by first quarter (April) revenue of $57.7 million. (Argan also operates a non core subsidiary that generated sales of $6.0 million during the period.) A natural gas facility in California accounted for $268 million of the backlog. Most of the rest was related to a wood chip burning operation in Texas. In the past Argan has installed a variety of wind, solar, and biomass systems.
Argan is working to get the necessary permits and approvals to build two major natural gas facilities in Pennylvania. The company is helping to finance the operator ("Moxie"), which plans to set up shop next to a major natural gas field and sell the elctricity into the northeast grid. Argan recently agreed to front more money (a total of $9 million) in exchange for greater operational controls. The ultimate contract could be worth $750 million to $1.0 billion.
The upcoming presidential election is creating uncertainty. The Democrats oppose natural gas because its low price undercuts other green energy options. The Republicans curry favor with coal and nuclear interests. Either way, we believe the United States will go with the best price performance option. Argan is well positioned to thrive as natural gas and solar become larger contributors to the electricity mix. We also believe the economy is capable of booming over the next decade, forcing utilities to expand generating capacity immensely.
In 2-3 years income could reach $2.50 a share. Applying a P/E multiple of 12x suggests a target price of $30 a share, potential appreciation of 120% from the current quote. If electricity shortages ever become a concern, a substantially higher valuation could emerge.
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