Powell Industries: Continuing to heat up
Powell Industries (Nasdaq:POWL) continues to persevere while other energy companies have experienced a seemingly endless amount of volatility.
After hitting a 52-week high in May, the Energy Select SPDR (AMEX:XLE), which contains top names such as Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP), has slid 19.3% in a matter of a few months.
But Houston-based Powell, on the other hand, continues to move up the charts; its stock price has been setting new 52-week highs with almost each passing day and is up 64.42% from a year ago.
The company, which was founded by William E. Powell in 1947, is not a direct play on energy, but generally benefits when energy markets prosper: it develops and manufactures equipment that is vital to the distribution and control of electrical energy and other processes. At a market cap of $621 million, it may not be as well known as a large-cap company such as Eaton (NYSE:ETN), but it is beginning to gain more recognition for its sound business model.
Powell serves customers such as oil and gas producers, refineries, public and private utilities, and mining and metals companies. In 2006, the company entered into a 15-year supply agreement with General Electric (NYSE:GE) to provide GE with switchgear, circuit breakers and other products.
Powell operates in two business segments: electrical power products and process control systems. The company’s electrical power products segment makes engineered-to-order electrical power distribution and control systems. These systems control the flow of electrical energy and provide protection to motors, transformers and other electrical equipment.
Powell’s process control systems business segment focuses on providing technology solutions that help customers manage energy and utility facilities. The segment also offers services that revolve around the development of security and communications systems. These systems aim to assist customers in process and facility management.
The company is coming off a second-quarter in which it was able to deliver record results and buck a temporary downtrend for small-cap stocks. For its second quarter ended March 31, Powell checked in with a 165% improvement in its year-over-year diluted EPS as revenue rose by 13%. The company’s backlog reached a record level of $537 million.These results enabled the company to raise its full-year forecast for 2008 to an EPS range of $1.85 to $2.10 on $650 million to $660 million in revenue. This projection is up from management’s prior guidance that indicated an EPS range of $1.65 to $1.90 on $625 million to $650 million in revenue.
At the time of the Q2 earnings release, when shares of Powell were trading around $47, Next Generation Equity Research managing director Ned Borland upped his target price to $55 on the stock and maintained his “buy” rating. “With the market outlook continuing to be strong in both the oil and gas and utility sides of the business, Powell should see sustained levels of order growth,” he wrote in a May 8 research note. “The company continues to remain aggressive on pricing to offset rising raw material costs.”
In early June, Borland downgraded the stock to “neutral” after shares met his price target. He noted that the company’s fundamentals remained intact and that the downgrade was based primarily on valuation. Last week in an interview with SmallCapInvestor.com, Borland said that he likes the overall picture at Powell from a long-term perspective. “Fundamentally, the company is in very strong shape,” he said. “Over time, I think the macroeconomic environment that it operates in will be quite favorable to Powell.”
Aside from a fully valued stock and challenges being encountered across the board in the energy markets, Borland said that the company’s recent buildup in staff could present challenges that are more company-specific. “Powell has made relatively sizable additions to its workforce over the past 18 months,” he said. “Productivity improvement is not always automatic, so there is a little bit of associated risk there.”
After such a strong performance in the first half of 2008, Powell should maintain its momentum in the second-half of the year.
About the Author
Billy Fisher is a certified public accountant and and freelance investment writer whose work has appeared in Investor's Business Daily and The Motley Fool.
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