On Wednesday, KeyBanc Capital Markets initiated coverage on Primoris Services Corporation (NYSE:PRIM) with an Overweight rating and a price target of $96.00. The stock, which has delivered an impressive 142% return over the past year according to InvestingPro data, currently trades at $77.54, suggesting potential upside to KeyBanc's target. The investment firm sees potential for significant value creation for PRIM, citing its strong position in utility scale solar and a growing power delivery business.
The analyst believes that these sectors, along with industry uptrends in the communications segment, will increasingly contribute to the company's revenue. This outlook aligns with PRIM's recent performance, as InvestingPro data shows revenue growth of 11.1% in the last twelve months, with the company maintaining strong financial health metrics.
Primoris Services is expected to see half of its revenue come from these core growth verticals by 2024, with an anticipated increase to two-thirds by 2027. KeyBanc predicts this shift will lead to a gross margin expansion, estimating an increase from 10.9% in 2024 to 11.9% by 2027. This margin growth, combined with mid-single-digit revenue growth and an improving balance sheet, supports the Overweight rating.
The analyst also highlights the positive impact of PRIM's renewables business on its free cash flow (FCF) trends. There is an expectation that Primoris Services could potentially become debt-free by 2027. With a target of 1.5 times net debt to EBITDA, KeyBanc suggests that Primoris has flexibility in capital allocation.
While acknowledging PRIM's mixed history with mergers and acquisitions (M&A), the analyst notes that smaller, strategic M&A could be beneficial. These tactical moves could support Primoris's expansion into small to mid-sized transmission projects and could be value accretive. The firm's cautious stance on large-scale M&A reflects a preference for targeted growth that enhances the company's existing strengths.
In other recent news, Primoris Services Corporation reported a strong Q3 2024 performance with record revenue surpassing $1.6 billion, marking a 7.8% increase from the previous year. This growth was largely driven by the Energy and Utilities segments.
The Energy segment experienced a boost from solar activities, while the Utilities segment saw growth from communications projects. Additionally, the company reported a record backlog of approximately $2.5 billion, primarily driven by the solar and industrial sectors.
Primoris Services Corporation also displayed financial strength with a cash flow from operations for the quarter at $222 million. The company raised its full-year EPS guidance to $2.85 to $3 per share, with adjusted EPS at $3.40 to $3.55. Despite a potential seasonal slowdown that may affect Q4 performance, the company maintains optimism for Q4 2024 and the year 2025, with a strong focus on safety, efficiency, and customer service. Furthermore, the company has nearly $625 million available for growth initiatives and anticipates growth in the renewables market.
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