Granite Construction Q3 Earnings Lag, Up Y/Y, Shares Down - Analyst Blog

Granite Construction Incorporated (GVA) reported a 15% year-over-year increase in earnings to 38 cents per share driven by improved performance in the Large Project Construction and the Construction Materials segments. However, shares of Granite Construction dipped 7.6% in a day following the announcement of results on Nov 3 as earnings per share missed the Zacks Consensus Estimate of 96 cents by a wide margin of 60%.

 

 

Operational Updates

Granite Construction's net sales dipped 2.7% year over year to $720 million, way short of the Zacks Consensus Estimate of $924 million. Increase in Construction Material segment's sales were offset by declines in the Construction and Large Project Construction segments.
 
Cost of sales declined 5% to $653 million in the quarter. Gross profit went up 19% to $67 million from $56 million in the prior-year quarter. Gross margin expanded 170 basis points (bps) year over year to 9.3%, mainly driven by improved performance in the Large Project Construction and the Construction Materials segments.
 
Selling, general and administrative (SG&A) expenses increased 4% year over year to $47 million. Timing of pre-bid costs along with investment in the Continuous Improvement initiative led to the increase in SG&A expenses.
 
Granite Construction reported operating profit of $19 million versus $10 million in the prior-year quarter.
 
Segment Performance
 
Construction: Net sales dipped 5% year over year to $447 million, primarily due to lower volume in a number of Western markets, outstanding claims and unsigned change orders, and timing of new work in the power business. Gross profit decreased 4% to $48.8 million from the year-ago quarter. Gross margin was 10.9%, up 10 bps from the prior-year quarter on the back of solid performance by power and underground businesses, offset by continued competitive markets in the West.
 
Large Project Construction: The segment reported sales of $179 million, down 4% from $186 million in the year-ago quarter, due to job progression in the quarter. Results were also impacted by delayed project awards, and several claims involving revenue resolution issues. Gross profit for the quarter came in at $5.7 million, an improvement from the gross loss of $2.2 million in the last-year quarter. The improvement can be attributed to project execution, offset by outstanding claims and unsigned change orders and the continued impact from projects generating revenue from contracts with deferred profit.
 
Construction Materials: Net sales in the reported quarter went up 12% year over year to $93 million. Increase in volumes related to private sector activity and mixed trends in the public markets led to the increase. The segment reported gross profit of $12.2 million, a 67% improvement from $7.3 million in the prior-year quarter. Gross margin was 13.1% compared with 8.8% in the prior-year quarter.
 
Backlog
 
Total contract backlog increased to a record $3 billion as of Sep 30, 2014, up from $2.6 billion as of Jun 30 2014 as well as from $2.8 billion as of Sep 30, 2013. This total, however, does not include the recently announced successful bid on the Pennsylvania Rapid Bridge Replacement Project, which is expected to add about $360 million to backlog in the fourth quarter.
 
Financial Update
 
As of Sep 30 2014, cash and cash equivalents amounted to $167 million versus $229 million as of Dec 31, 2013. As of Sep 30, 2014, long-term debt remained flat at $270 million compared with Dec 31, 2013. The debt-to-capitalization ratio was at 25.2% as of Sep 30, 2014 compared with 25.7% as of Dec 30, 2013. Cash flow used in operating activities for the first nine months of 2014 was $47 million compared with $64 million in the prior-year quarter.
 
Guidance
 
For 2014, Granite Construction now expects revenues to come at the bottom end of its previous guidance 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 record backlog and robust bidding activity bodes well for its future performance. A new long-term highway bill is essential to ensure longer-term funding that can meet the increasing demand for critical infrastructure projects across the country. Granite Construction recently experienced delays in project awards and lettings. Even though it was a headwind in 2014, it will benefit the comapmy's business in 2015.

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 #5 (Strong Sell).
 
Peer Performance
 
Among Granite Construction's peers, MasTec, Inc. (MTZ) reported third-quarter 2014 adjusted earnings (excluding one-time items barring non-cash stock compensation expense) of 53 cents per share on Oct 30, down from 59 cents earned in the year-ago quarter. Earnings were in line with the Zacks Consensus Estimate but below management's guidance of 56 cents.

Chicago Bridge & Iron (CBI) reported adjusted earnings of $1.51 per share which surpassed the Zacks Consensus Estimate of $1.39 per share by 8.63%. The bottom line also marked an increase of 34.8% from $1.12 a share earned in the prior-year quarter.
 
Tutor Perini Corporation (TPC) reported earnings per share of 73 cents, up 49% from 49 cents in the year-ago quarter but short of the Zacks Consensus Estimate of 75 cents.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
CHICAGO BRIDGE (CBI): Free Stock Analysis Report
 
TUTOR PERINI CP (TPC): Free Stock Analysis Report
 
MASTEC INC (MTZ): Free Stock Analysis Report
 
GRANITE CONSTRU (GVA): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research