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Aegion (AEGN) Up 26% in 3 Months: What's Driving the Stock?

Zacks Equity Research

Aegion Corporation’s AEGN shares have rallied 26.4% over the past three months, broadly outperforming its industry’s growth of 4.3%. Earnings estimates for the current and next year have been trending upward over the past 60 days, reflecting analysts’ optimism surrounding the company’s bottom-line growth prospects.

The solid price performance is mainly backed by productivity improvements and its cost-reduction efforts. Also, significant initiatives to enhance growth through innovative technologies are adding to the bliss.

Let us delve deeper into factors that make this Zacks Rank #2 (Buy) stock a profitable pick. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Strategic Initiatives to Drive Growth: Aegion had introduced restructuring activities back in 2017 to improve profitability and de-risk the business profile. The company streamlined and simplified the business structure in order to focus on markets wherein it can generate sustainable long-term returns. Also, Aegion exited markets wherein growth opportunities are limited and highly volatile, and entered into businesses with good operating leverage, as well as strong cash flow generation. Notably, these businesses enable the company to generate more predictable earnings and returns in excess of the cost of capital.

Since the inception of the strategic move, it exited 22 international contracting markets that lacked potential, scale and operating leverage to deliver consistent profits. Notably, these markets generated less than 10% of its total revenues and more than $17 million adjusted operating losses from 2014 to 2018.

In North America, it divested highly volatile upstream businesses and the Fyfe North America contracting unit. Evidently, in second-quarter 2019, the company’s adjusted gross margin improved 10 basis points (bps) and adjusted operating margin expanded 50 bps year over year, owing to restructuring and cost-containment efforts. Its total revenues, excluding contribution from the exited businesses, had a compound annual growth rate of 4% in the past five year. The company believes that these initiatives, which are likely to be completed by the end of the year, will aid overall performance in 2019 and beyond.

Solid Segmental Prospects: Given the above-mentioned initiatives, its three segments — namely Infrastructure Solutions, Corrosion Protection and Energy Services — are poised to come up with solid results going forward.

In the oil and gas market, the company is currently focused on well positioned and stable midstream and downstream markets, along with its core municipal water and wastewater markets. It also emphasizes on improving North America Corrpro operations, which lead to the generation of nearly two-thirds of revenues from the Corrosion Protection segment through cathodic protection offerings.

In the Infrastructure Solutions unit, it intends to leverage North America and European manufacturing footprint to expand third-party tube sales, which is a higher-margin and lower-risk model for serving international markets.

In the last reported quarter, the Energy Services business saw strong year-over-year improvement, driven by strength in its core maintenance activities. The company expects the segment’s backlog to grow in the third quarter. This will in turn position it for business growth in 2020.

Technical Enhancement Bodes Well: Aegion has increased investments in technology over the last few quarters. Resultantly, it is expected to bear fruits in 2020 and 2021. The company’s annual R&D investment more than doubled in the past three years. Moreover, it plans to invest more in technology over the next few years to build a cultural mindset regarding innovation.

Notably, it has significantly invested in the commercialization process. Also, the company has built internal mechanical service reinstatement technology and new UV Cure felt liner. Aegion is developing a new external weld coating technology and Liquid Ring, which is a more reliable and cost-effective method for applying liquid epoxy coatings to cross-country midstream pipelines.

These technical enhancements will help the company to come up with improved results going forward.

Solid Growth Prospect: Aegion, which shares space with frontdoor, inc. FTDR, Gibraltar Industries, Inc. ROCK and Construction Partners, Inc. ROAD in the same industry, has an impressive VGM Score of A. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with VGM Scores of A or B when combined with a Zacks Rank #1 or 2 offer solid investment choices.

The Zacks Consensus Estimate for the company's 2019 earnings indicate modest 3.4% year-over-year growth and the same for 2020 suggests an impressive 14.2% improvement. Notably, the company has a three-five year expected EPS growth rate of 10%.

Overall, it constitutes a great pick in terms of growth investment, supported by a Growth Score of A. Also, the stock carries a Value Score of A, which is suitable for investors looking for value investing.

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