Everys Construction Group Inc

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

Everys Construction Group Inc. (EVR) is a vertically integrated construction company focused on infrastructure projects such as road construction, communication, and energy systems, with significant operations in the industrial, utility, and residential sectors.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview EVR operates in a niche area within the construction industry, focusing on electrical, mechanical, and telecom construction, specifically working on infrastructure projects. The company’s revenue is generated from the following categories:

  • Industrial: This includes projects involving industrial machinery and facilities.
  • Utility: This involves infrastructure projects in sectors such as energy, water, and telecommunications transmission and distribution.
  • Residential: This includes construction of single and multi-family residential projects

These diverse sectors are served through three operational segments: Electrical & Mechanical (E&M), Transmission & Distribution (T&D), and Residential & Mixed Use (R&MU).

EVR differentiates itself through its ability to handle complex multi-faceted projects with a “full-service approach,” providing design, engineering, and construction all in-house. This reduces reliance on third parties and provides a cohesive experience to customers.

Furthermore, EVR has a strong market position, particularly with its E&M segment, where they are well-positioned to benefit from rising infrastructure spending.

Industry Trends The construction industry, while highly cyclical, is driven by long-term infrastructure requirements, demand for renewable energy projects, growth in communication networks, and housing. The industry has been affected by supply-chain disruptions, rising costs of raw materials, and difficulty finding workers. The trends are:

  • Infrastructure Spending: Increased government investment in infrastructure projects is providing tailwinds for construction companies involved in roads, power grids, communication, and broadband networks.
  • Renewable Energy: Increasing demand for renewable energy projects is pushing investment in new power generation and distribution facilities.
  • Communication Infrastructure: There is massive investment in 5G networks and the general need to modernize communication infrastructure.
  • Housing Shortages: The demand for housing continues to be strong due to low supply and rising population. This trend favors companies involved in residential construction.
  • Supply Chain Issues: There have been supply chain related issues and challenges, and the increased inflation has affected the construction industry.
  • Labor Shortages: The construction industry faces a severe labor shortage, which is why companies must invest in their employees and employee programs.

The industry is also quite competitive, with fragmented smaller players and some bigger players such as Aecom, KBR, and Fluor.

Moat Analysis: 3/5 EVR’s moat, while not as clear-cut as some of the “best businesses”, is characterized by a few important factors:

  • Integration: Vertically integrating engineering, design, and construction services helps secure long term client contracts and reduces the risk of client going to a competitor for separate parts.
  • Scale: The ability to handle large-scale, complex projects gives EVR a competitive edge, although it is dependent on specific client preferences.
  • Specialized Expertise: With experience in electrical, mechanical, and telecommunications construction, EVR has deep expertise that smaller companies might lack.
  • In-house talent: EVR has in place a team of people with deep specialized skills. This talent pool is hard to replicate and it ensures that the company delivers high-quality projects consistently.

However, EVR is not without its weaknesses:

  • Pricing Power: The company competes in a competitive landscape where price pressure will be very significant.
  • Commoditized Offerings: While their services may be technically complicated, the end product will likely have many substitutes.
  • Replicability: While setting up a fully integrated business will be hard, if the business is very profitable, competition will arrive at their doorstep at eat their profits.

The existence of “economic moats” has been proven by the company’s consistent profitability over the past years.

The rating of 3 / 5 reflects the fact that EVR’s moat is somewhat present and useful, but it does not fully guarantee long term out performance of competitors.

Risks to the Moat & Business Resilience: Several risks could erode the company’s competitive positioning and threaten its profitability: * Economic Downturns: Because EVR is exposed to industries such as housing, and construction, any recession or slowdown will reduce demand for their services. Their high leverage means they may have problems paying back the debts if a down turn hits. * Rising Costs: Raw material costs such as steel and concrete have been rising, which will impact their profitability. Also, the labor costs in the construction sector have been steadily rising as companies compete for employees, reducing margins. * Technological Disruptions: Technological disruptions in the industry-such as new methods of constructing or new materials-can affect EVR negatively. * Increased Competition: The construction market is quite competitive. New entrants or competitors might start to offer a similar service and pressure margins down. The company also faces significant competition from larger players such as Fluor and Aecom.

  • Loss of Large Contracts: If EVR loses one or two big contracts due to not bidding properly or miscalculating costs, they would take a massive financial hit. * Project Execution Risks: Projects such as infrastructure are high-risk, with delays and overruns being quite common.
  • Government Regulation: The company is very susceptible to regulations that limit their operations, increase input costs, or change demand.
  • Dependency on Key personnel: Having a team of specialists is an advantage but it also means having more dependency on them, if a key member leaves that could adversely impact the project.

Despite these risks, EVR’s integrated operations and focus on essential infrastructure provide some degree of resilience.

Financial Analysis Analyzing EVR’s financial data provides further insights into their performance and stability:

Income Statement:

  • Revenue Growth: In their Q3 report, they reported that revenues increased by 11.5% compared with the last years Q3. Although impressive, this is lower than last years Y-o-Y growth of 35.4%, indicating that they may have trouble maintaining the growth rate of the last years. It’s also worth noting that this growth is only present in some segments such as Electrical & Mechanical where the growth is 19%, while the others are negative.
    • Gross Profit Margins: The company’s gross margins have risen from 11.9% to 12.6% in the past year. The company had stated that it is expecting margins to decline in the coming quarters due to input costs, this is a notable point of concern.
  • Operating Profit: Their operating profit is around $45 million for the quarter, and the margin is 4.1% which is considerably higher than 2.7% a year earlier. Again, this margin is also expected to come down in the coming quarters due to cost pressures.

Balance Sheet

  • Leverage: EVR has a notable debt burden. Total debt of 1.66 billion compared with $784 million in equity shows that they have much higher leverage compared with most public companies.
  • Liquidity: Although the company has $220 million in cash, they are not generating enough cash to cover short-term liabilities. They are heavily reliant on their receivables.
  • Assets: Goodwill and Intangible assets contribute about 24% of the assets. Given that they are in a competitive and commodified industry, the value of the intangible assets is highly suspect.

Cash Flow Statement:

  • Operating Cash Flow: The operating cash flow has not increased as significantly as the income statement would show, and that’s due to a heavy reliance on accounts receivables. This is a notable point of concern.
    • Financing: They have been raising more and more debt to grow, but debt repayment was also significant, which means they are paying for the past debt. This highlights that most of the new cash was spent on re-financing their loans instead of true growth.

Understandability: 3/5 The company is relatively easy to understand, and all the complexities are well-explained in the filings. The business model is not revolutionary, but an integrated company with multiple sectors which can make analyzing their business more difficult. Hence the ranking of 3 out of 5.

Balance Sheet Health: 3/5 Although they are currently profitable, the business has a considerable amount of debt, which makes it hard for the business to handle economic contractions. They have limited cash, and heavily rely on receivables. Their assets are also less tangible as the goodwill makes up most of it. It’s not a totally dangerous balance sheet, but it is far from a completely strong one. Hence a ranking of 3/5.

Recent Concerns/Controversies

  • Lowered Guidance: The company has lowered its guidance on their gross and operating margins, due to the supply chain related issues that are affecting the entire industry. This lowered guidance is a notable point of concern.
  • Negative Cash Flow: Although they have reported increasing net profits, their operating cash flow is not following, indicating the business may be having some issues in converting earnings into cash flows, which may cause more problems in the future.

  • Increased Debt Load: They are having trouble keeping their debt low, and the recent acquisition of additional companies has increased the overall debt load. It’s a cause of concern given the competitive landscape and a potential recession.

  • Management Viewpoint: Management acknowledged in their latest Q3 call the headwinds that the entire industry is facing, but their view is that they would be able to increase growth in other sectors to offset the weakness of others. But their goal is still to focus on the overall margins and they will do what it takes to maintain their profitability.

In conclusion, EVR is an interesting business with a decent moat, however, many factors such as industry cyclicality, competition, and leverage may cause concerns in the future.