Pike Electric: Power lines "R" us
The lineman for the county doesn’t feel so lonely when Pike Electric Corp. (Nasdaq: PEC) arrives on the scene to lend a hand.
For more than six decades, the Mount Airy, N.C., company has sent its troops from the land of Andy Griffith and furniture makers out to install and repair power lines. Pike Electric is a contractor working for some 150 utilities in 19 states stretching from Pennsylvania on the north, south to the Florida Keys, and over to Texas in the Southwest.
As the story goes, World War II had just ended and Floyd Pike was looking to buy a truck to launch his business. Heavy equipment was in short supply and he was getting frustrated. He’d heard that a truck had fallen off a barge and sank in an inland waterway in eastern North Carolina, so he and a friend salvaged it, got it running, and drove it back to Mount Airy. That first truck, since retired and restored, is still at the company, which has Floyd’s grandson, J. Eric Pike, as its chairman, president and chief executive.
No matter what the season, Pike’s schoolbus-yellow equipment can be seen working to install or restore power lines and equipment – often in the wake of major natural disasters. Pike’s field crews – the majority of its 6,300 employees – can be called out to handle both the emergencies and the routine: putting up lines downed by hurricanes, re-energizing neighborhoods left in the dark by tornadoes or snowstorms, or installing new lines to meet the demands of a power-hungry region. To name a few of its biggest utility customers, Pike has had long relationships with such major players as Duke Energy Corporation (NYSE: DUK), for 60 years, American Electric Power Company, Inc. (NYSE: AEP), for 48 years, and TXU Corporation (NYSE: TXU), for 31 years.
Analysts show a slightly positive bias towards Pike Electric, which will report its fiscal 2007 results on Tuesday.
While initiating coverage on Pike Electric in mid-July with a hold rating, KeyBanc Capital Markets analyst Tahira Afzal did write in a research note that the company is likely to benefit from a correction in spending in the transmission and distribution sector, while benefiting from favorable industry trends.
In May, Robert W. Baird & Co.’s David Manthey upgraded his outlook to outperform from neutral, putting a target price of $26 on Pike, after the company reported third-quarter earnings rose to $6 million, or $0.18 per share, from $300,000, or $0.01 per share, in the year-ago quarter. Revenue dropped nearly 2% to $154.3 million. Still, the Baird analyst mentioned that the company is likely to generate 30% EPS growth in the 2008 and 2009 fiscal years primarily because of improving profitability and accelerating revenue growth from its powerline business.
But that earnings report also triggered Friedman, Billings, Ramsey & Co.’s Alex Rygiel to trim his outlook to market perform from outperform, while increasing the price target to $19 from $16.50. FBR concluded that it expects Pike to prove a good investment long-term, with a strong management team in place, but said it was waiting to see if the company can generate organic growth of around 10% and if it can raise operating margins consistently into the high single digits. Looking back at the past two quarters, gross margins have been 17.8% and 16.5%, respectively.
For most of Pike Electric’s existence, it has been privately held, mostly by the family, with some private-equity infusion within the past decade. The public has had a shot at owning a piece of Pike since July 2005, when it had its initial public offering that opened at $14.22. Shares have been trading around $20 in recent weeks, down from a 52-week high of $24.39 established on July 13, but above a recent $19 median share price target of analysts surveyed by Thomson Financial.
In many ways, the results posted for the 2006 fiscal year, ended June 30 a year ago, were skewed by Pike’s business strengths. Revenue totaled $727.5 million, up from $679.2 million the previous fiscal year, as Pike pitched in to rebuild the infrastructure along the Gulf Coast, the Carolinas and in Florida, decimated by a potent string of hurricanes. As noted in the company’s 2006 annual report, fiscal 2007 is more likely to represent a typical year for Pike.
The company has been restructuring, and had reduced its head count by about 10% as of the end of March, when compared with the same point the year before.
“The company is continuing to execute on our plan to exit low-margin business lines, renegotiate existing contracts and continue strengthening relationships with our customers,” CEO Pike said in a statement released with the third-quarter financial results on May 8. “In the short term, this strategy will reduce revenue and head count but is already showing a positive impact on operating margins and earnings.”
When the company reports on Tuesday its results for fiscal 2007, which ended June 30, the consensus estimate from analysts surveyed by Thomson Financial is looking for fourth-quarter earnings per share of $0.17, nearly double the $0.09 EPS reported last year. Full-year EPS is seen at $0.56, nearly halving the $1.07 reported for fiscal 2006, boosted by its storm-related business and the absorption of transmission and distribution power line contractor Red Simpson from a 2004 acquisition.
While quarterly revenue is expected to be flat or down slightly at an estimated $154 million, the analysts see full-year revenue dropping about 16% to $608 million.
CEO Pike has indicated that the changes brought about by the last year’s restructuring should energize the company with increased efficiencies.
“We continue to be confident that the trend for outsourcing power-line maintenance and construction will continue, as utility companies focus on their primary business of electric generation, and as utility company work forces continue to age,” he said during a May 8 conference call to discuss the fiscal third quarter’s results. “We remain focused on measured long-term organic growth and operating efficiencies, which result from a safe, professional and stable work force.”
