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Aegion (AEGN) Set for Improved 2018 Despite Cost Headwinds

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On Mar 19, we issued an updated research report on Aegion Corporation AEGN. The company is likely to benefit from the demand in the North America CIPP (cured-in-place pipe) rehabilitation business and improving margins in cathodic protection business. However, while its restructuring actions will lead to cost savings, restructuring charges will dent margins in the near term. Raw material cost inflation also remains a concern.

 

Its fourth-quarter 2017 adjusted earnings of 20 cents per share declined 55% year over year despite a 5% rise in revenues. Despite tepid fourth-quarter results, Aegion witnessed an increase of 20% in new orders in 2017. As of Dec 31, 2017, the company’s contract backlog improved 16.2% year over year to $689 million.

 

Q1 Expected to be Weak, Overall 2018 View Upbeat

 

In the first six weeks of 2018, some of the company’s U.S. and Canadian operations were affected by extremely cold temperatures. As it is, the first quarter is typically the weakest of the year as adverse weather conditions and slower customer work releases at the start of the new fiscal year lead to lower construction activities. Further, the absence of the large deepwater project which had a strong contribution in the first two quarters of 2017 will affect results this quarter.

 

However, for the full year, a strong backlog, ongoing strength in key markets, improved results from restructured operations and the lower effective tax rates due to tax reform will lead to a year-over-year improvement of more than 30% in earnings in 2018.

 

Segments Poised Well for Growth

 

For the Infrastructure Solutions segment, further penetration into the pressure pipe market driven by new product development, investments in underserved North America CIPP regions and improved product sales will boost results. Moreover, the increasing need for pipeline rehabilitation supports a long-term sustainable market for segment.

 

In the Corrosion Protection segment, the cathodic protection business’ margins are gaining from the multiple leadership changes in the first half of 2017 and the aggressive focus on improved project execution and labor utilization. The design and installation of cathodic protection systems to help prevent pipeline corrosion have historically contributed around 50% of the revenues for the segment. There are over one million miles of regulated pipelines in North America, which remain the safest and most cost-effective mode of oil and gas transmission. It remains an attractive and growing market which Aegion plans to invest in for future growth.

 

The Energy services segment has delivered improved year-over-year performance for four consecutive quarters which is anticipated to continue in the near term. Restructuring efforts undertaken in the past are also yielding results. Aegion has long-term relationships with oil refinery and industrial customers on the West Coast through the Energy Services segment and plans to leverage those relationships to expand services. There are opportunities in other industries on the West Coast such as oil and oil product terminals, chemicals, industrial gas and power to leverage its experience in maintenance and construction services.

 

Restructuring to Drive Long-Term Benefits, Hurt Near-Term Margins

 

The company is currently implementing its realignment and restructuring plan. The plans include the divestiture of the pipe coating and insulation businesses in Louisiana. It also involves the exit of non-pipe related contract applications for the Tyfo system in North America. Further, the company intends to reduce corporate and other operating costs as well as right-size its cathodic protection services operation in Canada. These actions will reduce exposure in the North American upstream oil and gas markets and generate more predictable and sustainable long-term earnings growth. During 2017, the company also completed a detailed assessment of the Infrastructure Solutions’ CIPP businesses in Australia and Denmark.

 

These restructuring actions will help reduce consolidated annual expenses by over $20 million. Cost reductions are anticipated to be fully realized in 2018. However, Aegion expects total restructuring and impairment charges to be between $115 million and $120 million. The additional $5 million to $10 million in remaining costs are expected to be incurred during the first half of 2018. Moreover, increased energy costs and labor costs will impact its margins.

 

 

Aegion has underperformed the industry in the past year. The stock has lost around 0.6%, while the industry recorded growth of 13.1%.

 

Aegion carries a Zacks Rank #3 (Hold).

 

Some better-ranked stocks in the industry include Patrick Industries, Inc. PATK, United Rentals, Inc. URI and Armstrong World Industries, Inc. AWI. While Patrick Industries and United Rentals sport a Zacks Rank #1 (Strong Buy), Armstrong World Industries carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

 

Patrick Industries has a long-term earnings growth rate of 11.0%. The company’s shares have been up 40% in a year’s time.

 

United Rentals has a long-term earnings growth rate of 18.5%. Its shares have gone up 48% in the past year.

 

Armstrong World has a long-term earnings growth rate of 16.8%. The stock has gained 24% in a year’s time.

 

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