Powell Industries Has Rarely Been Cheaper – Upgrade to Buy (NASDAQ:POWL)

POWL’s investment case finally looks compelling again after a moderate pullback

We previously covered Powell Industries, Inc. (NASDAQ: POWL) in June 2024, discussing its strong outlook due to higher investment across the oil/gas industry as spot prices remained increased compared to pre-pandemic levels.

There were great opportunities in the data center market as well, with the generative AI boom triggering increased electricity demands and expanded utility/data center projects. Even so, we believed there was a minimal margin of safety then, justifying our initial Hold (Neutral) rating.

POWL YTD share price

Since then, POWL has retreated further -10.5% to retest previous support levels of $130, before rising +28.5% to retest the February 2024 resistance level of $160 – with apparently missing the boat on our end (exaggerated). cautious) recommended entry point of $120.

Some of the tailwinds are naturally attributed to its double-digit performance in FQ3’24, with revenue of $288.17M (+12.9% ToT/ +49.8% YoY) and GAAP EPS of $3.79 (+37.8% QoT/ +149.3% YoY).

These numbers show that POWL’s higher R&D efforts at $8.43 million (+38.4% sequentially) and capital expenditures of $7.34 million (+56.5% sequentially) on LTM worked as intended in expanding its top performance.

The same was seen in its promising multi-year backlog of USD 1.3 billion (inline QoT/ inline YoY), albeit with relatively net net bookings of USD 356 million (+51.4% QoT/ -29.5% YoY ).

At the same time, POWL’s robust pricing power is also seen in its increasingly rich gross profit margins of 28.4% (+3.8pts ToT/ +6.2YoY), implying growing demand for its customized solutions for power management, control, and distribution.

Much of the tailwinds are attributable to the Petrochemicals/Oil & Gas sector, which continues to hold the bulk of its sales at 59.3% (-1 point ToT/ +9.7 YoY), with commercial and other industrial (including data centers) more and more. rising to USD 42.04M (+20.4% QoT/ +18.3% YoY) by FQ3’24.

From these developments, we can see that POWL’s initiative to launch new products and generate future growth opportunities in data center end markets has indeed shown early signs of success, especially as the growth rate beyond market forecasts of ~10% involves company capacity. to further expand the market share.

These developments may also be why management opted to acquire neighboring properties near its Houston headquarters for $5.5 million in order to expand its production capacity, building on the existing capital initiative of $11 million — both of which are expected to top the charts. batteries by mid-2025.

Advance consensus estimates

As a result of these developments, it is not surprising that the consensus has further increased forward estimates of POWL, which is expected to generate accelerated top/bottom-line growth prospects at a CAGR of +24.6%/+73, 8% by FY2025, respectively.

This compares with initial estimates of +7.7%/ +13.2% and historical growth of +3.1%/+11.9% between FY2016 and FY2023, implying market conviction about its growth prospects. long-term profitable growth.

POWL Ratings

For now, recent stock turnover has already moderated POWL’s FWD P/E valuations to 13.88x, down from the 5-year average of 17.61x and the sector median of 22.80x.

Even so, we think this correction makes the stock extremely cheap, after comparing the prime PEG ratio of 0.06x to the sector median of 1.81x, ABB ( OTCPK:ABBNY ) to 2.65x, Eaton ( ETN) at 2.22x and Schneider Electric SE (OTCPK:SBGSF) (OTCPK:SBGSY) at 0.71x, thanks to the former’s accelerated economic growth prospects.

So, is POWL stock a buysell or keep?

POWL 1Y Share Price

For now, POWL has continued to trade sideways after the huge rally in January 2024, with the stock looking like it couldn’t break out after that – potentially attributable to the high 17.93% short interest at the time of writing and the July 2024 market roll from the high. stocks.

For context, we provided a fair value estimate of $141.60 in our last article based on LTM GAAP EPS of $8.20 (+450% sequentially) ending FQ2’24 and FWD P/E valuations of 17.28x.

Based on POWL’s LTM GAAP EPS of $10.69 (+271.1% sequentially) ending FQ3’24 and new FWD P/E valuations of 13.88x, we’re looking at an updated fair value estimate of 148 $.40 – with the stock apparently currently trading at a premium.

Based on consensus raised FY2025 EPS adj estimates of $12.45, we’re also looking for an updated long-term price target of $172.80 – the stock seemingly offering a minimal margin of safety at current levels.

Finally, POWL’s dividend investment thesis remains underwhelming at forward yields of 0.63%, partly attributed to the stock’s high upside from the 2023 level.

Even so, we proceed cautiously to a Buy, with numerous caveats.

First, while the base case price targets appear to be disappointing, we believe the market is likely to improve POWL’s valuations closer to its average 5Y FWD P/E of 17x, triggering a long-term price target of bull-case of $211.60 and +26.3% upside potential.

Second, POWL appears to be well-supported at the last July 2024 $130 level, with those entry points also offering interested investors enhanced upside potential (best case) of over ~60% and extended returns of term dividend of 0.81% – allowing long-term shareholders to enroll in a DRIP program to regularly accumulate additional shares quarterly.

Three, with OPEC+ already “relaxing production curbs” and Brent spot prices already softening to ~$76/bbl, down from the $89/bbl peak seen in 2024, $96/bbl in 2023 and $123 per barrel in 2022, we may be entering the painful period of commodity normalization – potentially closer to pre-pandemic levels of $65 per barrel.

As a result, while many major oil/gas producers have engaged in capital growth, effectively securing POWL’s outlook, readers may wish to monitor industry developments over the medium term, especially given the ongoing US elections and presidential candidates’ positions on fracking.

Ultimately, POWL is likely to remain volatile in the short-term, based on the stock’s sideways movement since early 2024, it is likely to be a viable trading candidate before its long-term outlook stabilizes. Hence, it goes without saying that the stock is only suitable for those with higher risk appetite in the meantime, before its stock trading pattern reverses.