Argan: From Boom to Base Case, Execution Is the Real Story

Elevator Thesis

The engineering and construction industry may not make national headlines, but it is the backbone of modern life. It involves large projects, extensive timelines, and numerous pieces where strong execution can turn everything around.

I have assessed many industries over the years, but this is the first time I am doing a deeper dive into an engineering, procurement, and construction (EPC) company, and the timing is especially interesting.

The company is none other than Argan Inc. (AGX, Financial). It is an EPC company that operates on natural gas and renewable energy projects such as solar and wind.

Argan has three segments: Power Industry Services, Industrial Construction Services, and Telecommunications Infrastructure Services.

The company reported a nearly threefold increase in backlog since early 2023, with large-scale combined-cycle gas plants that offer multi-year revenue visibility and mid-cycle margins.

The bull case is based on the reality that Argan can achieve on its backlog of $1.86 billion. It has a debt-free and cash-rich balance sheet. This provides it the flexibility to acquire quality projects without overstretching.

Moreover, the company has the capacity to achieve mid-to high-teens gross margins and EBITDA margins of 15% or above, which are on par with bigger and more diversified companies. That said, this strength is already incorporated in the valuation.

Additionally, its stock currently trades at a forward EBITDA multiple of more than 20x and has an earnings yield of just 3%. Alongside, its free cash flow generation has been weak. Therefore, the company has little room for error.

Briefly, it cannot afford to make any mistakes in its execution.

Spoiler: AGX suits only those with an appetite for risk, otherwise, I assign the stock a Hold rating right now.

A Perfect Storm of Demand and the Need for Solid Contracts

The demand for electricity in the United States is increasing at a rate that has not been witnessed in decades and the change is already reflected in the numbers.

In 2024, the nation used around 128 terawatt-hours more power than the prior year. The growth is being fueled by a mixture of reasons: high-speed buildout of data centers, the expansion of EV charging points and a boost in domestic production due to federal incentives.

This is an unusual time when companies that design and build large-scale power plants could lock in significant long-term growth.

The largest catalyst to this demand growth, however, has been AI data centers. Major facilities are already using over 1 gigawatt of electricity (which would serve a city of 2 million) and tech giants like Google, Microsoft, OpenAI and Meta are scaling up to multi-gigawatt projects that will further increase demand.

According to industry projections, the electricity demand from data centers could increase more than twofold within five years. Many of these operators are also building their own generation capacity to ensure that there is a constant supply.

This opens a direct door to companies like Argan. Although it must be kept in mind that higher demand only creates opportunity. It does not equate to guaranteed revenue.

In the meantime, the U.S. power mix continues to transition to utilization of sources that are less polluting on a long-term basis. In 2007, coal contributed to about 50% of all the electricity generated, by 2024, this had reduced to 15%.

On the other hand, natural gas has increased to 43% within the same duration as old coal plants phase out. Compared to coal, natural gas emits about half as many emissions and is much more reliable than wind or solar, which can only produce in favorable conditions.

This has made gas-fired plants the default solution to covering demand spikes that renewables cannot supply. This trend suits the position of Argan since natural gas plants enjoy fewer competitors and bring significantly more revenue per project than the majority of renewable ones.

Along with these structural changes, the push to revive manufacturing in the United States and the proliferation of EV charging stations are piling further strain on the grid.

The combination of these trends makes one of the most attractive business environments in decades to companies such as Argan.

The potential is large enough, yet it will be converted into stable growth, depending on whether the company will be able to win the contracts in a highly competitive market and efficiently deliver projects.

Growth Driven by Power Projects and Expanding Backlog

Argan is beginning to emerge as one of the more interesting infrastructure plays. It is because the growth being demonstrated is not merely a one-off quarterly spike. Rather, it is the result of multi-year positioning in power and industrial construction. Let’s see what the numbers say!

Argan’s revenue escalated from $509.4 million in FY2022 to $874.2 million in FY2025 (20% increase).

Q1 FY2026 continued the run with $193.7 million in revenue, which is a 23% annual increase.

Source: stockanalysis.com

Importantly, the backlog has almost tripled since early 2023, rising to about $700 million to a whopping $1.86 billion today, with the management expecting it to exceed $2 billion before the end of the year.

Most of that backlog is in combined-cycle gas plants, and those are typically built on 3-4 year schedule. This provides Argan with an unusually high level of forward visibility compared to other contractors of its scale.

Source: Argan’s First Quarter Fiscal 2026 Results (Company Website)

Further breakdown provides more clarity.

The Power Industry Services continue to drive most of the momentum. In Q1 FY 2026, this segment produced approximately $160 million or 83% of revenue, which is a 45% surge YOY.

The top line is now being driven by large projects such as Trumbull and the 1.2 GW Sandow Lakes plant. Industrial Construction has been at a steady $29 million and Telecom is at $4 million. This is also in line with the management decision to focus on higher value scopes.

Source: Argan’s First Quarter Fiscal 2026 Results (Company Website)

In other words, the company understands where its bread is buttered and it is leaning into that strength.

Argan Delivers Mid-Cycle Margins with Discipline and Financial Strength

Argan’s margin history indicates that it has managed to produce steady profitability despite the project cycle variations.

Source: macrotrends.net

Gross margin increased from 16% in 2021 to nearly 20% in 2022 and 2023, before dropping to 14% in 2024 and rising again to the high teens in 2025.

The EBITDA margin trended similarly, starting in the high single digits in 2021 and rising to approximately 9-11% in 2022 and 2023, and settling in 2024, then increasing to around 12% in 2025.

The level of Net margin also rose over time, almost to 10% in 2025. These are not mere one-off spikes. Even in Q1 2026, margins were even higher as gross margin was at almost 19% and EBITDA margin approached 15%. This shows that improvements are already holding.

Versus Peers: The difference is also more noticeable when we look at competitors.

MasTec (MTZ,Financial) has an enormous backlog in the mid-teen (billions) and it is diversified into communications, clean energy, power delivery and pipeline. Its adjusted EBITDA margins have remained in the 5 to 12% bracket between 2021 and 2024, but they have wildly varied across the segments. Clean Energy and Infrastructure might occasionally do mid-teen to the low-20s margin but Pipeline and Power Delivery tend to remain in the middle digits.

Quanta (PWR,Financial)has a more stable and diversified base but it is unlikely that it will ever generate mid- to high-teens margins on the entire business. When comparing to Argan, which is smaller and more concentrated, the results can be lumpy. Although when the projects are performed properly, margins will always improve.

The strengthening of the margins and the rapid rise of the backlog demonstrate that Argan is not seeking to win work through bid wars but acquires quality projects on favorable terms. That is what would give the company leverage as it continues to develop its pipeline and deliver at the same level.

Balance Sheet: The balance sheet relates directly to the story.

Currently, Argan is sitting on approximately $189 million in cash and its debt is a mere $2.7 million. That is peanuts considering that the company has a market value of around $3.1 billion. It is safe to say that the company is virtually debt-free.

To add to that, its debt-to-equity level is only 0.01, and it has not been paying any interest in the last nine years. Also, the negative net debt-to-EBITDA of -4.8 indicates that it has a lot of cash on its hands relative to its earnings.

This assists in bonding capacity, working capital when new projects are initiated and gives the company the ability to avoid contracts with low returns. Argan has also been providing more than 5% in ROA and 10% in ROE since fiscal 2022, a reflection of its growing backlog and improved project mix.

This indicates that management is not only increasing its revenue but is also turning it into shareholder value.

Indeed, Argan is fundamentally strong, but the investors need to be vigilant to see what they are paying for. This makes the valuation story compelling.

Valuation: Absolute and Relative Perspectives

Argan is expensive compared to its peers on a relative basis. The share is trading at a multiple of 31x earnings, as compared to Quanta’s 37x and MasTec’s 29x. On EV to EBITDA, it is about 21x, compared to PWR’s 22x and MTZ’s 15x. The premium is more evident on the sales and book value, where Argan trades at 2.8x sales and nearly 8x book value, which is higher than both peers. This tells us that the market is already pricing mid-teens EBITDA margin performance out of Argan, something it has already started to demonstrate in recent quarters.

Source: Author Generated Based on Data

The figures are not as generous from an owner’s perspective. The trailing twelve months’ income was approximately 100 million, giving an earnings yield of 3% at the current $3.1 billion market value. The free cash flow was significantly lower at $13 million, translating to a yield of less than half a percent. Investors are paying over 20x forward EBITDA. To be honest, this is high in light of this company being a contractor. In simple terms, an outright owner investing today is only earning an estimated 3% earnings yield. At that price, Argan will need to grow free cash flow at a high-single-digit rate over many years or boost its returns on equity by a significant margin above the 10% that it has averaged since 2022. That leaves little room for error.

Alternatively, the valuation can be viewed as price per backlog.

Source: Author Generated

As mentioned earlier, the company has a market cap of $3 billion and a backlog of $1.86 billion. This means that investors are paying $1.57 for every $1 of signed work. That ratio has been progressing in the correct direction. In fiscal 2024, when the backlog was only $757 million, the implied price was more like $3 per backlog dollar. By fiscal 2025, backlog reached a high of $1.36 billion, reducing the ratio to $1.80. The $1.57 price today reflects a valuation that is on par with its backlog growth, but also reflects a view that backlog will continue to grow and so will its margin.

In case of execution failure or slowdown in the backlog momentum, the downside is also clear: a reversion in valuation to more of the 15x EV/EBITDA multiple seen in the past would reduce the value of equity by over 20%. Conversely, if Argan can convert its backlog of $1.86 billion into consistent earnings growth and enhanced free cash flow, the premium today could stand up, or even creep up toward that of Quanta.

So, its trade-offs are quite simple. The quality, focus, and strong balance sheet are reflected today in the stock price. The issue is that the free cash flow has trailed far behind the earnings, which leaves the earnings yield slim. As long as that gap is not bridged, the valuation is extended. At this point, any misstep translates into a significant downside, whereas the upside is highly dependent on near-flawless execution and the continued growth of backlog.

Potential Risks

To begin with, AGX has a high concentration of backlog in very few large projects, which exposes the company to the risk of termination or delay in the completion of a project. The Sandow Lakes Power Station alone is worth 1.2 GW and has a backlog of more than a quarter of the total. Projects would normally be added only after a notice to proceed, but unexpected problems, including financing setbacks, permitting delays, or cancellations by owners, may cause an abrupt decline in the backlog and result in an immediate market response.

Second, timing risk is material. Some of its biggest projects are to be completed in 2025-2026. The backlog may drastically reduce without attracting new contracts before these come to an end. Hence, a revenue lag and possible multiple compression. This is more so in a competitive bidding environment where work involving high margins cannot be guaranteed.

Third, there is no automatic relationship between the increased power demand boom and new plant construction. In 2024, new plants were not needed to provide the vast majority of the 128 TWh increase in U.S. electricity consumption. The greater use of existing plants did the job. As AGX earns money building facilities, a long-term increase in efficiency at current facilities would reduce the pace of new project demand.

Collectively, these risks imply that the future direction of AGX is dependent on its ability to continually win and deliver large contracts with high margins as it deals with industry demand fluctuations.

Final Word

The way forward to a more constructive position is straightforward: (1) clear the current backlog and restore balance between earnings and free cash flow; (2) win additional high-quality awards to restore backlog above the $2 billion mark and maintain terms that will keep EBITDA on a double-digit path; and (3) demonstrate that recent margin improvement is sustainable through the project cycle. Should Argan achieve those levels, today’s premium can be maintained, or even move toward best-in-class companies.

Until then, Argan is a high-risk, high-reward bet.

The business is well in the right lane, the balance sheet is strong, and the backlog gives a clear visibility of the future. However, the stock price has factored in that the company will continue to execute flawlessly and will keep converting its profits to cash.

This content was originally published on Gurufocus.com