NV5 Global Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

NV5 Global Inc. is a provider of professional and technical engineering consulting solutions to public and private sector clients, focusing on infrastructure, energy, construction, real estate, and environmental markets.

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.

NV5 operates in a fragmented industry, offering a diverse range of engineering consulting services. It’s primarily a project-based business, meaning its revenue is directly tied to the volume and size of projects it secures and completes.

Business Overview

  • Revenue Distribution: NV5’s revenue streams are highly diversified across a range of services, rather than being tied to a single industry. This provides some resilience. They are categorized into:
    • Infrastructure: Primarily consists of construction quality assurance and infrastructure engineering services.
    • Energy: Includes design and construction of solar, battery storage, and other renewables projects, as well as transmission and distribution projects.
    • Buildings & Real Estate: Includes architectural, mechanical, electrical, plumbing, and structural engineering for new buildings and renovations.

    • Environmental: Involves assessment, remediation, and other environmental and natural resources consulting services.

    • Geographic Focus:
      • While the company operates nationally across the US, a significant portion of the business, particularly related to energy projects, is concentrated on the East Coast. International sales appear to be a small portion of the revenue
  • Industry Trends: The engineering and consulting market is influenced by several trends:
  • Increased investment in infrastructure spurred by both federal and state governments, like the Infrastructure Investment and Jobs Act in the U.S.
    • Growth in renewable energy and energy infrastructure is creating new project opportunities.
    • Growing demand for environment and social governance (ESG) consulting.
    • A shift from larger projects towards more smaller and mid-sized projects, which is changing the market.
    • A trend towards consolidation in this highly fragmented market.
  • Margins and Profitability: NV5 operates on relatively thin margins, where a large portion of revenue is eaten by service delivery costs, making it difficult to achieve outsized profits. The company often touts its profitability but when factoring in non-recurring and goodwill costs their margins are quite ordinary.
  • Gross margins and EBITDA margins were 27.9 and 10.6 percent respectively in the first quarter of 2024, lower than previous years.

  • Management is focused on reducing cost through standardization of processes, use of technology, and cross-selling.

  • Competitive Landscape: The market is highly competitive and fragmented. NV5 competes with smaller specialized firms as well as larger players like AECOM, Jacobs Engineering, and WSP Global.
  • While NV5 can leverage scale benefits, they will still have to deal with local and regional competition.
  • The industry itself is not easy, as its labor intensive and requires skilled consultants.
  • What Makes NV5 Different: NV5 describes itself as a value-based provider, focused on providing innovative and cost-effective solutions. Their model is focused on diversification of business units and geographic locations. While there is a certain amount of vertical integration they also rely heavily on acquiring profitable local firms to expand their market share and geography.

Financials in Depth

  • Recent Performance: Q1 2024 revenue was $210.6 million, up 9.9% year-over-year. Net income was down 59.2% year-over-year and EBITDA was down 35.8% year-over-year. In 2023, annual earnings declined by almost 20%, despite revenue increases. The company’s quarterly and annual results show heavy fluctuation which reflects its reliance on a high volume of service contracts.
    • While revenue continues to grow, the decline in profits may indicate an issue with profitability and competition within specific markets. The decline in their EBITDA may also raise concerns about their performance as a growing company.

  • Management attributes the decline in profitability to higher costs resulting from rising labor costs, reduced operating efficiencies due to the transition from legacy systems, and project delays due to supply chains. They also admitted that they under budgeted for those items in the prior year, which implies that they had more control over the results.

  • Balance Sheet:
    • The company does have large goodwill and intangible assets ($980.7 million) which comprises a majority of their total assets ($1,818 million) that could be written off in the future.
    • Their debt load has increased dramatically in recent years reaching 468.7 million in the first quarter of 2024.
    • While the debt load is manageable, most of the debt seems to be variable interest rate loans, which will create more volatility in the company’s financials in the face of high interest rates.
  • The company has cash reserves of $126 million, which are below the liabilities of the company and may not be sufficient to meet their obligations.
  • Cash Flows:
    • Historically, the company has generated strong operating cash flows and used them to fund their frequent M&A activity. However, this might be under pressure from decreasing earnings. *The company’s free cash flow has been volatile in recent years.
  • Acquisitions: M&A is an important part of the business. They have acquired numerous small companies over the years. The company often pays a premium to acquired companies.

Moat Analysis

Moat Rating: 2/5

NV5 has some characteristics that would classify it as having a moat, but they are weak and difficult to sustain, making them a very vulnerable moat.

  • Switching Costs (Weak): There are some switching costs in the engineering world, as clients get used to working with firms. But these are very low, since there are no specific contracts that make switching a difficult endeavor, which means competition will be fierce. Once a consultant leaves a specific firm, they can also take their clients with them, further minimizing any barriers to switching.
  • Economies of Scale (Weak): The company does have economies of scale in that their larger size allows them to access certain clients and do projects that smaller players are unable to, but this is not a great edge as the industry is still very competitive. Many times scale in this industry does not translate to outsized profits, as the projects are very labor intensive.
  • Intangible Assets (Weak): NV5 does not have strong intangible assets that offer them an edge in the market. Brands do matter, but NV5 does not have a brand name that allows it to charge premium prices.
    • While NV5 has a high percentage of repeat clients, this is common across all consulting and engineering firms, meaning it does not represent a meaningful competitive advantage.
    • The level of technical knowledge they have might give them a slight edge, but that knowledge quickly becomes outdated and does not prevent competition.
  • Network Effects (None): There are no network effects in the engineering consulting business that give the company a competitive advantage over its competitors.

Moat Risks & Resilience

  • Competition: Highly competitive and fragmented market where customers can pick providers among a wide variety of firms, and most of the customers are usually not locked to one specific consultant.
  • Labor Market: The scarcity of talented professionals makes retaining the right talent a constant worry, and increase labor costs if they become more competitive for that talent, which in turn impacts the company’s already poor margins.
  • Reliance on Government Contracts: A portion of NV5’s revenue comes from federal and state-funded projects, and as such the company’s revenues can be dependent on government policies and budget cycles, introducing a potential risk of income fluctuation.
  • Technological Disruption: New technologies like AI may reduce some of the jobs and projects that have historically provided revenue for NV5 and other competitors. They may also be forced to spend heavily on those technologies in order to compete in the marketplace.
  • Integration Risks: As the company relies heavily on acquisitions, if they do not integrate acquired companies well, their synergies might not be met and could reduce profitability.
  • Goodwill Write-Down: A large amount of goodwill that is on the balance sheet can result in large future losses.
  • Leverage: A growing debt load increases risk and interest rate sensitivity. This may also impair future M&A activity, which is a core tenet of NV5’s growth strategy.

Understandability Rating

Understandability: 3/5

While the business model itself is not complicated to understand, the underlying nuances are harder to grasp:

  • The variety of service offerings, and their individual drivers, makes it difficult to evaluate the business.
  • The specific value proposition of the company is hard to understand.
  • Its M&A activities may be hard to track and may not generate much value.

Balance Sheet Health Rating

Balance Sheet Health: 3/5

While not in immediate danger, the company’s increasing debt load combined with their lack of clear economic moats and declining profitability make their balance sheet and financial health vulnerable in the face of adversity.

  • The company has a large amount of intangible assets and goodwill on their balance sheet, which may be subject to impairments in the future.
  • Their reliance on variable interest rates, given the current interest rate environment, further increases financial risk.
  • Cash reserves appear low.
  • The company’s profitability may be under pressure from competition and increased labor costs.