Energy Services of America Corporation (NASDAQ:ESOA) has just disclosed that it earned $197 million for the fiscal year that ended in September 2022, the highest it has ever earned. The company’s sales have increased for the second year in a row, which is unusual in its 17-year history. According to projections, sales will increase again in 2023 and 2024. Six subsidiary businesses that serve a variety of industries, including natural gas, petroleum, water distribution, and the automobile, chemical, and power industries, make up ESOA.

Two of these companies, Tri-State Paving and Ryan Construction Services, were acquired in the third and fourth quarters of 2022 and currently account for 4% of the business’s overall sales. ESOA was only established in 2006, although its subsidiaries have a combined 50 years of industry expertise. Also, in Q3 2021, the business repurchased all of its preferred shares. This will support the business’s ongoing reinvestment of that money and increase value for holders of common equity.

Analysis of the Market

Electrical, mechanical, and pipeline construction all face intense competition from one another as well as high operational expenses. The contractor’s bid and their ability to complete the work on the schedule are the primary deciding factors in who receives the assignment. As a result, businesses and individuals with a lot of resources are frequently in a stronger position. In order to do this, ESOA increased its workforce from 553 in 2020 to 1,055 in 2022, a twofold increase.

Strong Backlogs and Sales Projections

ESOA has been net profitable for nine out of the last 10 years, more than doubling the net wealth of its equity holders in the process. In 2023 and 2024, respectively, the company is projected to earn $222 million and $230 million in revenue. Its expansion is anticipated to be largely driven by new acquisitions. Because of its shifting revenue mix, the company is well-positioned to accomplish these objectives because it has been able to distribute its earnings almost equally among its various service segments, which include gas and water distribution (GWD), gas and petroleum transmission (GPT), and electrical, mechanical, and general (EMG) (EMG). More than 80% of the business’s earnings during the previous ten years came from the latter two service divisions. Nonetheless, the increasing proportion of GWD’s sales will enable ESOA to increase its profits as GWD has the greatest gross profit margin (51.8%), followed by GPT (30.7%) and EMG (15.3%).

The company’s backlog of work has increased by 100% as well. Before you start raising your eyebrows, let me clarify. Having a backlog is beneficial for construction companies as long as they complete their projects on schedule. With a $142M backlog, the company will be able to maintain a robust cash flow in the future. The business hasn’t been able to consistently distribute dividends, but last month it issued the most recent one, which was worth $0.05 per share.

On the other side, ESOA has frequently announced buybacks. The most recent one, which had no expiry date and was for $1 million, was on July 7, 2022, demonstrating the company’s sound financial position. In 2022, ESOA fully repaid all of its outstanding preferred shares that were backed in part by debt. This is fantastic news for stockholders since it will increase their share of earnings because taxes will decrease as a result of debt replacing preferred shares.

Increased debt led to changes in capital structure. The entire debt of ESOA as per the most recent annual report has increased to $32.2 million. This consists of a $15 million long-term debt and a $17.2 million short-term debt. This is a result of numerous events that took place within the corporation in 2022, including acquisitions and redemptions. A line of credit that the corporation took out is the main source of its current debt. This might assist the company in meeting its short-term working capital requirements, but it will also increase margin pressure and exacerbate the issues brought on by its long-term debt.

The company’s retained earnings of -$22.2 million demonstrate that it is still making up for losses from the past while having more than doubled shareholders’ equity to $38.3 million in eight years. Even while commencing buybacks and paying dividends might not seem to be a problem, the company’s negative retained earnings and negative levered free cash flow raise questions about the durability of its finances.

Valuation

I like to value ESOA stock based on how much its competitors are valued because the current levered free cash flows are negative and the future cash flows are unclear. Here is how I assess those companies based on their average EV/sales over the previous five years:

For the last five years, ESOA’s average EV/sales have been 0.25, which is roughly 63% less than the average of its peers. It’s still 50% off even though there is some margin for error and the businesses of its competitors aren’t all the same. Hence, the firm’s price should be at least $2.58 multiplied by 50%, or $5.16. Why do investors believe ESOA to be less compelling than its competitors? What services does ESOA provide? That is the solution. While the majority of its rivals concentrate on the distribution of energy and have access to more resources, it offers services for the distribution of gas, water, and oil. A company’s value is believed to increase as its market capitalization increases, but ESOA hasn’t been able to get to that point yet.

Risks

The company’s stock is a micro-cap stock, which denotes that it only transacts an average of 25,000 times annually. A year or two may pass before ESOA’s most recent acquisitions are tested to determine how well they perform. Moreover, as was already said, the company’s rising debt may have a more significant impact on its cash flows and margins than anticipated.

Monitoring of Stocks Opinion

The most recent additions to the company’s portfolio increase revenue while also expanding its customer base and improving teamwork. The business had a difficult beginning and was removed from the NYSE in 2012, but it has persevered and managed to stay profitable. Management has consistently produced results and returned the money to shareholders throughout the years. Despite the fact that its stock was relisted last year, neither investors nor experts have yet taken notice of it. I still want to include it in my portfolio, even at the current price.

Bottom Line

The Wall Street rating for ESOA stock is a strong buy. I believe that ESOA is currently a buy based on what I know about the company’s advantages and how I value it.

Featured Image: Pexels @ Magda Ehlers

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