Aegion Corp (NASDAQ:AEGN) reported a largely weak 4Q2015 in which EPS declined by a double-digit percentage. The management warned that current quarter bottom-line will likely fall below a similar period a year ago as foul winds persist.
Weak market conditions and currency headwinds played a major role in clouding Aegion’s performance in the last quarter. But what will 2016 be like for the company? This Aegion analysis article examines the company’s strengths and weaknesses so that you can make investment decision based on fact rather than myth. But first, here is quick recap of Aegion’s earnings results in the last quarter.
4Q2015 highlight
Aegion Corp (NASDAQ:AEGN) posted 4Q2015 EPS of $0.36, a penny better than the consensus estimate but down 25% YoY. On an adjusted basis, the company posted EPS loss of $0.91, a penny worse than a similar quarter a year ago.
Revenue reading of $331 million fell 6% YoY and also missed the consensus target of $338 million.
The chart below shows Aegion’s revenue and cost of revenue for the last five quarters:
What’s exciting about Aegion?
- The company is right-sizing
Because the management of Aegion Corp (NASDAQ:AEGN) understands the unfavorable conditions in the energy sector, they are aggressively working to reduce the company’s exposure to more risky businesses. For example, Aegion has recently significantly lowered its exposure to certain typically high cost North American oil regions.
This operations realignment measure is both expected to preserve cash and lower operating cost burden. It is a laudable move as the company battles multiple challenges because of the price decay in the oil market.
- Efficiency drive
Aegion Corp (NASDAQ:AEGN) is underway with a restructuring plan that is specifically designed to make the company operate more efficiently. Therefore, what the management is doing is looking for opportunities to trim costs. The restructuring initiative kicked off as a response to the declining crude oil prices and Aegion has been gradually scaling the program to reign in on costs everywhere.
Aegion’s ongoing restructuring efforts are expected to yield roughly $15 million in cost synergies with the bulk of the saving expected to fall in 2016.
- Aggressive debt reduction program
Aegion Corp (NASDAQ:AEGN) finished 2015 with $337.8 million in long-term debt, which decreased from $351.1 million in the previous year. The management recently reiterated its commitment to continue strengthening the balance sheet by paying down the outstanding debt. This year, the management has scheduled to reduce the debt by $18 million.
- Capability expansion
In the recent years, Aegion Corp (NASDAQ:AEGN) has tended to increase investment to boost capacity in more lucrative segments such as midstream and pressure pipe markets. As part of the efforts to accelerate expansion in pressure pipeline market, Aegion acquired Underground Solutions, thus adding to its portfolio key tools, PVC technology and talents to enable it to succeed in the segment.
Acquisition of Underground Technology cost Aegion $85 million and the management expects the transaction to be accretive to earnings this year.
The idea of doubling down efforts in pressure pipe market is to unlock more sustainable long-term revenue growth opportunities.
- Positive outlook
Despite troubles in the energy sector, Aegion Corp (NASDAQ:AEGN) is looking forward to favorable conditions in many of its end-markets. The management is citing municipal water and wastewater systems rehabilitation as a particularly promising segment in 2016.
It is estimated that trenchless water system rehabilitation opportunity in North American is worth more than $1 billion. Given its brand reputation, expertise and scale, AEGN is well-placed to grab a large pie of the market.
- Large contracts
In 4Q2015, Aegion signed a multi-year involving providing pipe coating and insulation solutions. The contract should guarantee a significant level of revenue inflow for a couple of years, thus mitigating the pressures of weak macroeconomic conditions.
- Solid backlog
Although 2015 was largely a challenging year for Aegion Corp (NASDAQ:AEGN) as it was for many other companies because of oil price rout and global economic slowdown, the company still management to grow its backlog in the year. Aegion’s backlog in 2015 rose a decent 2.4% to $776.5 million, defying an $11.1 million hit courtesy of currency headwind.
What’s worrying about Aegion?
- Intense competition
Aegion Corp (NASDAQ:AEGN) has a serious war to confront in North American upstream market in 2016. Because of the collapse of crude prices, customers have reacted by cutting their expenditures. The result is that upstream projects have become few and those few available are hotly contested.
- Adverse impact of realignment
As Aegion tries to position itself to avoid taking more serious hit from crude oil price rout, the company risks losing revenue. It has significantly narrowed exposure to the more troubled North American oil region, but it could lose roughly $100 million from that region in 2016. Such a shock to the topline could be felt right down at the bottom-line.
- Currency headwind
A strong U.S. dollar against a basket of major global currencies is a thorn in the flesh of Aegion Corp (NASDAQ:AEGN). Unfavorable shifts in the forex market caused a negative hit to Aegion’s financials in 2015 and the problem could be more severe in 2016.
- The cost of restructuring
To cut cost, Aegion will send home some 652 employees. But it will cost money to retrench the workers. It is estimated that Aegion could face pre-tax cash charges of $7 to $8 million in the form of employee severance, benefits and other costs related to the workforce reduction. The bulk of the retrenchment related charges are expected to fall in the current quarter. That further complicates the picture for Aegion given that the company is already taking a beating from oil price rout and slowdown in various segments of its business.
Capital deployment
Aegion Corp (NASDAQ:AEGN) recently declared a fresh buyback program that will begin after the completion of the existing program sometime this year. The new buyback program is also $20 million same as the existing one that was to cover 2015 and a bit of 2016.
Takeaway
Aegion Corp (NASDAQ:AEGN) is trying to right-size, which is a great move for the company to survive prevailing pressures in its industry. But the fact of the matter is that meaningful growth may be out until perhaps after 2016. Current holders may be encouraged to maintain the ticker in the portfolio but aspiring shareholders may have to wait until there are genuine signs of the clouds clearing.