We came across a bullish thesis on Granite Construction Inc. (NYSE:GVA) on ValueInvestorsClub by Fuego.Suave. In this article, we will summarize the bulls’ thesis on GVA. The company’s shares were trading at $79.11 when this thesis was published, vs. the closing price of $87.92 on Jan 02.
A construction worker standing atop a metal framework of a newly built structure.
GVA operates as an infrastructure contractor in the United States. It operates through two segments: Construction and Materials segments. The Construction segment engages in the construction and rehabilitation of roads, bridges, rail lines and other infrastructure. The Materials segment is involved in the production of aggregates, asphalt concrete, liquid asphalt, and recycled materials production.
There has been a turnaround in the business ever since Kyle Larkin became CEO in 2021. Prior to 2021, it was highly mismanaged. The firm used to bid on large projects that were met with delays and cost overruns. It also came under the radar of the SEC due to account fraud. The focus is now on smaller projects with a size of $5 million. This has enabled GVA to improve its EBITDA margin from 6.4% to an expected 9.5%-10.5% in 2024. There is further potential for margin expansion as highlighted by the management: 200-300 bps for the Construction segment and 500-600 bps in Materials.
Another key reason for growth has been the ability to draw government projects that account for 80% of its revenue. It is estimated that only 15% of the Infrastructure Investment and Jobs Act fund has been allocated or spent, creating a stable core revenue for GVA in the years to come. GVA also operates using a Vertically Integrated Model, offering it a competitive advantage that may enable it to secure more bids.
The stock appears to be undervalued with an EBITDA multiple of almost 10x while its peers KNF and ROAD command a valuation of 12.3x and 18.4x. There is a potential for a $100 million increase in EBITDA due to the recent acquisition. This would result in an estimated price of $115 using a multiple of 10x, reflecting a 31% upside from the current market price.
While we acknowledge the potential of GVA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than GVA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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