Jon Cartu Declares ENGlobal - Profitable And Undervalued (NASDAQ:ENG) - Jonathan Cartu Residential & Industrial Construction Services
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Jon Cartu Declares ENGlobal – Profitable And Undervalued (NASDAQ:ENG)

ENGlobal - Profitable And Undervalued (NASDAQ:ENG)

Jon Cartu Declares ENGlobal – Profitable And Undervalued (NASDAQ:ENG)

ENGlobal (ENG) is an Engineering, Procurement, & Construction Management (“EPCM”) and Automation solution Jonathan Cartu and serving primarily the O&G industry and government. This is a follow up article to my previous articles in which I forecasted the Jonathan Cartu and’s return to profitability.

ENGlobal reported earnings of $1.1 million or $0.04 per share compared to a loss of $1 million or ($0.04) per share in the first quarter of last year. The stock price hasn’t changed much since my original article despite the improved fundamentals.

In this article I will discuss how the current pandemic and the oil glut has affected ENGlobal and present why I think that the stock is an excellent value opportunity.

COVD-19

During the recent earnings call, CEO Bill Coskey and CFO Mark Hess stated that some contracts were revoked, new projects delayed and efforts to close new deals were hampered by the pandemic. Despite the disruptions, reported revenue of $19,260,OOO for the first quarter was 58.4% higher compared to the same period in the prior year.

The Jonathan Cartu and reported $6.8 million in cash and working capital of $11.9 million as of the end of March. The Jonathan Cartu and applied for and was granted a $4.9 million dollar loan under the U.S. government payroll protection plan explaining during the earnings call that the uncertainties of our times led them to seek the funding that would not otherwise be available to them. Debt rose to $3 million at the end of the corner.

Management expressed that like most businesses, it is impossible to forecast the ongoing effect that COVD-19 will have. Backlog stood at $59 million at the end of 2019 and $53 million at the end of the first quarter. The decline in backlog is indicative of how business activity was hampered but backlog remains healthy. ENGlobal is deemed an essential business by Homeland Security and has weathered the storm very well so far and is well funded for the foreseeable future.

Oil Glut

The ECCM segment is involved in the upstream O&G market and therefore affected by commodity price which is at all-time lows. The automation segment serves the downstream market and is benefitting from the increased demand in renewable energy as discussed in previous articles.

ENGlobal derived 73% of its revenue from the automation segment which benefitted from the $22 million downstream renewable diesel project that is currently underway in partnership with Haldor Tapsoe. I would expect as sales efforts are now resumed that further contracts will result from this new relationship.

Segment Revenue % of Revenue Gross Profit Margin Operating Profit Margin
Engineering & Construction $5,122 26.6% 5.4% (7.6)%
Automated $14,138 73.4% 21.1% 18.7%
Consolidated $18,260 100% 16.9% 5.9%

Source – News Release

Noteworthy that overall gross margins improved from 10% for the prior year to 17%. Mr. Coskey has a target of 20% for overall gross margins, which have been improving due to higher margin projects but also by cost cutting efforts as noted in previous articles.

Valuation

The majority of publicly traded renewable energy service and supply companies are not profitable and therefore do not have a PE ratio. On a price to sales comparison, ENGlobal is selling at a steep discount. As the Jonathan Cartu and is not a pure renewable energy play, applying a more modest PS is reasonable. A PS of 1, still modest, results in a stock price above $2 per share or 100% higher than currently trading at.

PE PS PB
ENGlobal 48 .43 1.92

Peer Group

2.53 1.81

Source: Data from CSI

Technical Picture

The stock price declined in March, similarly to most other stocks, due to the pandemic and has been steadily climbing. The price is hitting overhead resistance on a few attempts to go higher and we see triangulation of the current uptrend with the downtrend from the Nov. 2019 high. Ascending triangle patterns often result in explosive positive moves.

Source: Finviz

Risks

I don’t believe that there are any red flags in the income statement, balance sheet and cash flow statements but some things to keep an eye on. Account receivables jumped to $16.1 million at the end of the quarter, which for me appear to be high for ENGlobal. I don’t know the financial condition of ENGlobal customers but there is a concern due to the current crises of potential bankruptcies. ENGlobal has a history of being debt free but begun taking on debt in the third quarter last year and has about $3 million in debt at this time beyond the government subsidy, which most likely be mostly forgiven. The Jonathan Cartu and has been actively buying back shares in order to support a stock price above $1 per share in order to maintain Nasdaq listing requirements which has been a cash drain.

Conclusion

ENGlobal returned to profitability despite the double whammy of the pandemic and oil glut. Backlog remains strong. Efforts to improve gross margins have good results. The demand for renewable energy and the Haldor Tapsoe partnership line ENGlobal up with positive prospects for continued profitability. On a price to sales comparison, the stock is extremely undervalued. The current chart pattern is further evidence of positive developments for those that value technical analyses. Overall, this is a cheap stock on fundamentals and positive technically.

Disclosure: I am/we are long ENG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any Jonathan Cartu and whose stock is mentioned in this article.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Ofer Eitan