KeyStone’s Stock Talk Show Episode 269.
Great to chat with you again – I will start with our Star of the Week, Argan Inc. (AGX:NYSE), a stock which has been BUY recommendation in our US Coverage dating back to March of this year. The cash rich business, which provides a full range of construction and related services to the power industry, saw its share price surge 33% on very strong Q2 numbers. The stock has doubled in 2024. In our YSOT segment, Aaron answers a viewer question on Northland Power (NPI:TSX), a global power producer established in 1987, focused on advancing the clean energy transition by generating electricity from renewable sources. The viewer noted the company recently reported what looked like strong financial results, but the stock price keeps trending lower. Aaron let’s you know his take on the stock which pays a just under 6% dividend. Finally, Brett takes a viewer question on D2L Inc. (DTOL:TSX), a provider of an online education platform through a single cloud platform. The company has a strong balance sheet and solid historical revenue growth and while the stock has faired decently in 2024, it remains below its initial IPO range – Brett let’s you know why and how the current fundamentals stack up.
Let’s get to the show –my cohost, Mr. Aaron Dunn – and one half of the killer B’s, Brett – Brennan in in the Bush somewhere in Saskatchewan – I can only assume on Mooseback at present.
What does Argan do?
Argan Inc. (AGX) is primarily a construction firm involved in Power Industry Services (74%), Industrial
Construction Services (23.5%), and Telecommunications (2.5%) that conducts operations
through its wholly owned subsidiaries. The company provides a full range of engineering, procurement, construction, commissioning, maintenance, project development, and technical consulting services to the power generation market. Argan’s service offerings focus on the engineering, procurement and construction of natural gas-fired power plants and renewable energy facilities.
Why did has the stock surged 33% in the past couple of days and why has it doubled in 2024?
The jump in the past couple of days was produced by a blowout earnings quarter:
The company smashed analysts consensus earnings estimates and easily beat the most optimistic street estimates on earnings.
This drove the stock over the past couple of days.
The year-to-date gains are really just a continuation of this trend, positive outlook in quarterly calls from management and backlog moving to record levels from significant contract wins.
Let’s take a closer look at the just released Q2 numbers.
Revenues up 61%
Earnings up 39%.
Gross margin were lower which is something we are monitoring but this was largely due to a changing project mix in the quarter and will fluctuate with differing projects – it is something we monitor.
Shows you a continuation of the growth seen in Q1 – even an acceleration on the topline.
Let’s take a look at a key driver moving forward – strong contract wins in quarter pushed the backlog to $1.0 billion.
Backlog.
Argan closed the second quarter with backlog of $1.0 billion, which reflects an increase from last quarter of approximately $210 million, and includes $570 million of renewable projects.
Commenting on the backlog and outlook – management stated that the addition of high energy demand data centers, the onshoring of manufacturing operations and the expansion of electric vehicle use are primary drivers of the increasing forecasts of future electrical power demands and the robust pipeline of new business opportunities. Argan’s pipeline remains strong and the company is confident that Argan’s energy-agnostic capabilities and proven success leave the business well positioned to compete effectively for the growing number of projects coming to market.
One of the elements that attracted us to Argan – which is a more volatile business than we traditionally recommend given the contract driven nature of its work – was the very strong balance sheet that continues to strengthen.
Huge cash balance relative to the market cap even with the surge in market value – 38% of the market cap it cash with limited debt. We like to use net liquidity as a better view of actually or excess cash for Argan and this is still very strong at $259.8 million.
I highlighted the 2025 forward PE – it may come down given the increase in backlog, earnings beat and the potential for further beats this year and into next.
Conclusion:
Clients will be updated over the next week.
The 33% gain in the last 2 days and 100% gain YTD, make it our Star of the Week.
YSOT D2L Inc. DTOL:TSX
1)
D2L Inc. or DTOL on the TSX is a provider of online education through a single cloud platform. The company serves over 18 million K to 12, higher education and corporate education users across North America, Europe and Australia.
2)
The stock is currently trading at $12.75 a share up 19% per year with a market cap of $345 million.
3)
The stock is trading lower than its 2021 high of just over $17 right after its IPO, during that time we saw frothy valuations, especially in the remote work and education theme. The stock fell, to the $5 range by late 2022. So, does the company actually have merit to it, or was it just one of the many companies that got lucky with its valuation in 2021?
4)
Looking at a high level, we can see that revenue has grown relatively consistently on a quarterly basis since the IPO, as well as seen a general trend toward profitability. So the financials do have some legs on them when it comes to growth.
5)
Now looking at the most recent quarter, fiscal Q2 2025.
In US dollars, total revenue increased 11% year-over-year, to $49.2 million.
Subscription and support revenue increased by 12% to $44.0 million.
Resulting in annual recurring revenue increasing to $198.3 million.
Adjusted EBITDA increased to $4.2 million from a loss of $0.5 million.
GAAP earnings improved to a loss of $0.3 million, effectively breakeven from a loss of $4.8 million.
As well the company is now guiding for fiscal 2025 subscription and support revenue growth of $178 to $181 million, implying 11% growth from the midpoint. Total revenue revenue of $199 to $202 million, 10% implied growth.
And is guiding adjusted EBITDA of $22 to $24 million implying growth of 11% from the midpoint.
6)
Shifting to the balance sheet it is strong, holding, $98 million in cash with the only debt being leases of $12.5 million. The cash balance is largely due to the significant capital raised during its IPO at too high of valuations, although the company has also bought back shares since offsetting some of the issuance.
I will also note that like many subscription services, the cash is paid up front resulting in a large deferred or unearned revenue liability, in D2L’s case they have deferred revenue of $113 million. In a growing business, this means cash flows will generally look better than the income statement.
Operating Cash flow for 6 months came in at $16.6 million but had an increase of $19.1 million due to deferred revenue. Ultimately being the cause for positive cash flow during the first six months.
That’s not to say receiving cash upfront is bad, it’s overall a good thing it’s just a factor you should be aware of when looking at the company’s financials.
7)
Shifting to valuations,
The company is currently trading at 1.3 times guided fiscal 2025 sales, and 7.3 times forward EV/EBITDA.
8)
Overall,
There don’t appear to be any massive red flags, strong balance sheet, growth over time and a reasonable valuation.
However, the company is still only at the breakeven point for GAAP earnings, given the front-loaded cash scenario. If the company is able to push into GAAP earnings it gives a bit more weight as it accounts for things like stock compensation, and attempts to properly match revenue and costs. The company has shifted from large losses to the current breakeven point and we would like to see that increased profitability trend continue.
A couple of things I would be looking for is how the company spends its cash as it is open to M&A. Even though I didn’t get into here they have both acquired and divested during the last year, so a better picture of the long-term M&A strategy is a question we would pose to management. As well just more details into how they expect to acquire market share in the competitive EdTech space.
So to close off before the guys give their thoughts, the company is interesting and passes the initial sniff test, it doesn’t have some absurdly low valuation at this time either, it is a company we will continue to monitor as well as delve into deeper into the strategy likely with a call to management.
