contractor without contracts, page-17

@figures,

The most striking thing to me about WOR is just how much fat there remains to be carved out of the business.

This is quite typical for a business that emerges from a period of extremely buoyant business conditions, and margin restoration takes a bit of time.

The good news for WOR shareholders is that the process of eliminating the dead wood and cutting out the largess has begun in earnest.

Looking at some of the operating margins over time gives some idea of just how much earnings upside exists once the business's revenues find a base:

WOR's Revenue (and EBIT Margins) since the acquisition of Parsons in November 2004.
FY2005: Rev = $1.4bn ; EBIT Margin = 7.4%
FY2006: Rev = $2.5bn ; EBIT Margin = 8.1%
FY2007: Rev = $3.5bn ; EBIT Margin = 9.0%
FY2008: Rev = $4.9n ; EBIT Margin = 10.7%
FY2009: Rev = $6.2bn ; EBIT Margin = 9.7%
FY2010: Rev = $5.0bn ; EBIT Margin = 8.6%
FY2011: Rev = $5.9bn ; EBIT Margin = 8.0%
FY2012: Rev = $7.4bn ; EBIT Margin = 7.2%
FY2013: Rev = $7.6bn ; EBIT Margin = 7.0%
FY2014: Rev = $7.4bn ; EBIT Margin = 6.1%
FY2015: Rev = $7.2bn ; EBIT Margin = 5.8%
FY2016: Rev = $5.9bn ; EBIT Margin = 5.1%


As can be seen, most recent margins are at an all-time low, and at almost half of their levels when WOR last recorded similar Revenues (i.e., 2009/9/10), (after the elevated levels of input cost inflation in the resources services industry from 2010/11 resulted in some margin compression despite rising Revenues).

So, assuming that WOR's Revenues base at around $5.0bn sometime over the next two years and assuming that the significant cost reduction and restructuring exercise gets EBIT margins to - not all the way back up to ~10% - but to less than half way between there and the current bombed out levels of ~5%, i.e., to, say, 7.3%, that would result in EBIT in excess of $360m, which would be a 20% recovery on FY2016's baseline level.

The resulting valuation multiples at that stage would be just 14x P/E and 8.9x EV/EBITDA and Net DEbt-to-EBITDA would be roughly a mere 1.3x, according to my modelling. These are both below current valuation multiples for the broader market.

My experience is that when the market senses deep cyclical businesses like WOR approaching the the bottom of their business cycles, then those stocks start to re-rate to a premium-to-market multiples ahead of the anticipated recovery in earnings at some point in the future.

In the case of a combination of improved operating margins plus market sentiment looking beyond the current earnings trough, WOR's stock price would still have considerable upside, despite it having more than doubled in value over the past 12 months.