Granite Construction Falls on Q1 Loss - Analyst Blog

Shares of Granite Construction Incorporated GVA have dipped 4% since it reported adjusted loss per share of 49 cents in the first quarter of 2014 on Apr 30 compared with the year-ago quarter's loss per share of 57 cents. The reported loss per share was much wider than the Zacks Consensus Estimate of 36 cents per share.

The adjusted results exclude the impact of a discrete tax charge of $1.6 million related to tax law changes in the State of New York. Including this, Granite Construction reported a loss per share of 53 cents compared to a loss of 57 cents in the prior-year quarter.

Operational Updates

Granite Construction's net sales edged up 0.3% year over year to $380 million but missed the Zacks Consensus Estimate of $432 million by a wide margin. Increase in Large Project Construction segment and Construction Material segment's sales was offset by declines in the Construction and Real Estate segments.
 
Cost of sales went up 3% to $358 million in the quarter. Consequently, gross profit dropped 29% to $21 million from $30 million in the prior-year quarter. Gross margin contracted 230 basis points (bps) year over year to 5.6%. This was driven by project timing in the Large Project Construction segment portfolio, along with a decrease in Construction segment gross profit partly offset by improvement in Construction Materials segment performance.

Selling, general and administrative expenses declined 14% year over year to $49 million. This was due to a decrease in pre-bid costs, incentive compensation and the non-recurrence of fourth-quarter 2012 acquisition costs related to Kenny. Granite Construction reported an adjusted operating loss of $28 million versus a loss of $27 million in the prior-year quarter.

Segment Performance

Construction: Net sales dipped 11% year over year to $157 million, primarily attributable to a change in the mix of power projects in the Large Projects Construction segment. Furthermore, adverse weather had a negative impact on revenues. Gross profit plunged 31% to $9.1 million from the year-ago quarter. Gross margin was 5.8%, down 170 bps from the prior-year quarter due to the decline in revenues.

Large Project Construction: The segment reported sales of $187 million, up 9% from $172 million in the year-ago quarter mainly driven by project timing and inclusion of a portion of power revenues.  It reported gross profit of $15.8 million in the quarter, down 30% from $22.7 million in the last-year quarter. Consequently, gross margin contracted 480 bps year over year to 8.4%.

Construction Materials: Net sales in the reported quarter went up 19% year over year to $35 million. Increase in volumes due to a recovering private sector and stronger fundamentals in the public works market led to the increase. The segment reported gross loss of $3.5 million compared with gross loss of $6 million in the prior-year quarter. Gross loss margin was 10% compared with a loss of 20% in the prior-year quarter.

Backlog

Total contract backlog increased to $2.6 billion as of Mar 31, 20134 compared with $2.5 billion as of Dec 31, 2013 and $2.4 billion as of Mar 31, 2013.

Financial Update

As of Mar 31 2014, cash and cash equivalents amounted to $206 million versus $229 million as of Dec 31, 2013. As of Mar 31, 2014, long-term debt remained flat at $270 million compared with Dec 31, 2013. The debt-to-capitalization ratio was at 27% as of Mar 31, 2014 compared with 26% as of Dec 30, 2013. Cash flow used in operating activities for the first quarter was $19.8 million compared with $54.6 million in the prior-year quarter.

Guidance

For 2014, Granite Construction expects revenues in the range of $2.4 to $2.8 billion. Gross profit is expected to improve significantly over 2013 levels. Consolidated EBITDA margin is projected in the range of 5% to 7%

Our Take

Granite Construction's backlog, project funding and financing have improved and private constructions are also showing signs of growth. Furthermore, diversification opportunities underground, in power and tunnel position the company for growth. The backlog at quarter-end reflects a diverse, healthy portfolio of projects which bodes well for the company. Both the Construction and Large Project Construction segments are expected to gain momentum starting second quarter with Large Project recognition later in the year, driving overall improved performance in 2014.

Watsonville, CA-based Granite Construction is a leading infrastructure contractor and construction materials producing company. Its project teams represent the best in the industry; serving both public and private-sector clients in transportation, power, federal, tunneling, underground, industrial/mining and water resources markets.

Granite Construction currently carries a short-term Zacks Rank #3 (Hold). A better-ranked stock in the building and heavy construction industry worth considering is EMCOR Group Inc. EME with  Rank #2 (Buy).

Peer Performance

Among Granite Construction's peers, Chicago Bridge & Iron Company N.V. CBI posted first-quarter adjusted earnings of 87 cents per share, 22.3% below the Zacks Consensus Estimate of $1.12 per share. Adjusted net income, however, improved 12% year over year on the back of strong project activities during the quarter.

Primoris Services Corporation PRIM reported first quarter earnings of 21 cents, up 11% year over year and a penny ahead of the Zacks Consensus Estimate.