Babcock & Wilcox Enterprises Is A ‘Sell’ After The Stock Pops (NYSE:BW)

Overview

The run-up in the share price of Babcock & Wilcox Enterprises, Inc. (NYSE:BW) in July ’24 makes this a profit-taking opportunity, igniting our Sell rating, at this time. There is a Strong Buy consensus among the few analysts following BW. They forecast higher earnings over the next few quarters based on management’s statement to shareholders because the company expects to generate sufficient revenue while pursuing higher-margin contract work and cutting overhead. We believe changes in direction will take longer than a few quarters to impact the financials and raise the share price to a talked-about target of $5 per share. Here is how Seeking Alpha foresees the EPS:

BW is a 155-year-old energy and environmental solutions company operating in three segments. Its stock slumped over the last 5 years and is down ~68% in 12 months. The stock is volatile. Its Levered/Unlevered Beta is 2.22 over 24 months according to Seeking Alpha and 3.30 currently. Our February article assessed the stock as a Hold but potentially a moderate buy at ~$1.05. On news of an asset sale, the shares popped in July to $2.07. The price will probably wander in this vicinity for a while, suggesting to us that this is a potential Sell opportunity.

Shares topped $9 each in May 2021. The price eventually collapsed to a 52-week low of $0.75. It did not climb much after management said in April ’24 that they were adjusting the FY ‘24 EBITDA target from $105M to $115M. The price held steady in May when the company announced operating income in Q1 ’24 was $4.3M compared to $1.3 in Q1 ’23. The CEO added exciting news that the company signed $500M in new contracts in Q1 ’24, double over Q1 ’23. Backorders topped $800M, or 29% more than the backorders reported in the first quarter of the prior year. The stock price floated between $1 and $1.20 per share, back and forth, as investors seemingly ignored the CEO’s positive guidance.

Profile

Babcock and Wilcox designs, sells, and installs clean energy equipment, tech R&D for energy and other companies, and services and maintains and converts equipment to comply with government regulations and laws.

The share price floated in May between $0.92 and $1.20. The Q1 earnings announcement and positive guidance from management did not impact the share price:

• Q1 ‘24 revenue ($207.6M) was less than Q1 ’23. Analysts anticipated better results, though BW was more selective in pursuing higher-margin contracts.
• BW’s gross profit margin has been about 22.4% over the past 2.5 years. The Oil & Gas Equipment and Services industry’s g. p. averages 28%.
• The company’s net loss of $15.8M in Q1 ‘24 included a $5.1M loss on debt extinguishment; the net loss in Q1 ’23 was $12.7M. The industry net profit averages 4.5%.
• EPS was -$0.22 compared to -$0.18 Y/Y per quarter.
• Adjusted EBITDA of $12.5M was less than the $13.6M the year prior.
• In December ’23, total debt was $379.5M ($437.1M TTM) and cash, equivalents, and receivables hit $335.5M ($305.7M TTM).

On July 1, ’24, the company announced the sale of its Denmark-based unit for $87M in cash at closing on June 28. Management will use the money to pay down debt and improve liquidity, and its working capital. Little other information has been released. Shares were up 34% that day. Corporate insiders had been exercising options and purchasing shares in bulk since the closing months of 2023.

Risk

We are impressed with the gross amount of newly signed contracts; we worry that the back orders are lagging fulfillment because the company is pursuing cost-cutting measures that can delay order fulfillment. We are skeptical of any serious turnaround in earnings over the next few quarters. And if the Republicans win in November, high on the agenda are environmental regulation cutbacks that can negatively affect BW’s future revenue.

Despite more revenue, the Q1 ’24 actual earnings of $-0.22 EPS missed estimates by $0.09. The company frequently misses quarterly estimates of GAAP EPS per Seeking Alpha charting reveals.

Momentum recently surged. The Factor Grade improved from Fs to an A. Grades for Valuation, Growth, and Profitability slipped from 6 months prior. Even now, there does not seem to the Relative Strength in BW compared to RSI.

Seeking Alpha has maintained a long-term Quant Sell Rating of BW stock until the announcement of the sale. But the slide bar still tilts in that direction. The glittering generalities of how management plans to use the $87M will be telling. $87M added to the $335.5M in cash, equivalents, and receivables nearly equals the company’s debt load.

Valuation

BW pays no dividend. BW does not rate a PE ratio because it has no sustained earnings. The high Factor Grade for Valuation is based on its Enterprise Value-to-Sales and Price-to-Sales. EV-to-EBITDA (TTM) gets a failing grade. We believe the A Factor Grade for Momentum will tumble again unless there is support for another cash sale of another major company asset or a takeover offer.

BW’s growth in sales compared to major competitors is woeful. BW’s price-to-sales ratio is 1.9% versus 10.4% P/S among BW’s 4 top peers. Looking back at the debt and shareholder equity, the company’s debt-to-equity ratio hovers around -200%. Short-term liabilities outstrip short-term assets.

Before snagging $87M in cash, the company’s register was on the path to being drained. Free cash flow might have lasted 10 to 12 months if management’s machinations did not kick in. We will have to wait several quarters to be in a liminal state before definitively knowing the cash runway. If management can increase margins and reduce costs, then the future looks bright and worth resisting our rating near the end of the year.

Takeaway

In our opinion, BW rates a Sell after the share price nearly doubled since the sale of its Denmark operations were sold. The share price fell from $2.07 to $1.87 in less than a week and moved up 8 cents to close last week, reflecting the stock’s volatility over the previous 24 months. It might not tumble to $1, but we do not see an incentive undergirding the $5 target price this year. Management unlocked capital with the sale (and there may be more actions like this to come) but we await to learn about taxes, commissions, and bonuses to be paid. We do not know what the appraisal was for the operations.

While Wall Street analysts rate the stock a Strong Buy with a target price consensus of $5.00 over the next 12 months, the banking and investment firm Craig-Hallum announced in July a rating upgrade of BW with a $2 target price; in April the shares sold for ~$1 when the firm made a $50M transaction offer to investors.

Mark Twain’s quip is a good reminder to current and potential BW retail value investors, “What gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so.”