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Aegion (AEGN) Strong on Order Flow, Costs Continue to Rise

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Aegion Corporation’s (AEGN - Free Report) strong order flow, demand in the North America CIPP rehabilitation business, as well as strategic acquisitions and divesture initiatives are major growth drivers. However, higher labor and material costs and non-recurrence of the large deep-water project might hamper the performance and margins of this Zacks Rank #3 (Hold) company.

Meanwhile, Aegion’s shares have gained 12% in the past six months against its industry’s decline of 1.7%. The uptrend was backed by solid performance, given strong order flow and demand in the North America CIPP rehabilitation business. Also, the company’s earnings surpassed the Zacks Consensus Estimate in two of the trailing four quarters, with an average positive surprise of 1.4%. While earnings estimates for 2018 remained steady over the past 30 days, the same for 2019 has moved upward by 1.9%, reflecting analysts’ optimism on the stock’s earnings growth prospect.



Driving Factors

Aegion’s Infrastructure Solution Business (accounting for 47.9% of the total revenues) is one of the significant contributors to the company’s growth. In the first half of 2018, the segment contributed more than 6% year-over-year revenue growth, driven by higher North America CIPP volumes and inflated number of staffs to serve new order growth. In fact, record orders from the NAR CIPP business brought backlog above $300 million as of Jun 30, 2018. Total segment backlog came in at $376 million at the end of second quarter.

Apart from Aegion’s Infrastructure Solution business, the Energy Services segment has also been delivering improved year-over-year performance since the past six quarters, which is anticipated to continue in the near term as well.

Aegion has long-term relationships with oil refinery and industrial customers on the West Coast through the Energy Services segment and plans to leverage the same to expand the services provided in mechanical maintenance, electrical and instrumentation services, small capital construction, shutdown and turnaround maintenance activity, as well as specialty services. The segment is anticipated to deliver 4-6% revenue growth in 2018 and operating margin is expected to improve 75-150 bps on the back of 2% increased backlog, given higher maintenance and construction services.

Also, the cathodic protection business, within Corrosion Protection segment, continues to record year-over-year improvement, particularly within the United States, where gross margin expanded 600 bps through the first six months of 2018 from a year ago. Adjusted operating margins are now expected within 3.5-4%, slightly up from prior expectation, backed by improvements in cathodic protection businesses and large international field joint coating projects.

Additionally, Aegion follows systematic strategic actions, comprising restructuring activities, that are targeted to generate more predictable and sustainable long-term earnings growth.

On May 14, Aegion agreed upon a plan to divest the company’s CIPP business in Australia under the Infrastructure Solutions Segment. Meanwhile, on May 4, the company acquired Hebna Inc., Hebna Canada Inc. and Hebna Corporation (collectively “Hebna”), under Corrosion Protection Segment, for a total purchase price of $6 million, which will boost its pipeline lining services.

Concerns

Aegion is observing a tighter labor market across North America, which is expected to become more challenging as the company enters the peak of construction season in the upcoming months. Gross margin contracted 80 basis points (bps) in the second quarter of 2018, mainly due to increasing labor, fuel and chemical costs in its North American operations, and certain isolated project execution issues related to CIPP contracting installation services activity in its European and North American operations.

Also, Aegion lowered its full-year 2018 outlook in its recent earnings call. The company now expects 50-100 bps operating margin improvement from 2017 level, depicting a reduction from the previous guided range of 100-200 bps. Meanwhile, the company expects Corrosion Protection’s revenues to decline 10-15% in the second half of 2018, reflecting the lost contribution from the deepwater project.

Moreover, the company expects total restructuring and impairment charges from previously announced actions to be approximately $120 million.

Stocks to Consider

Some better-ranked stocks in the industry include Continental Building Products, Inc. (CBPX - Free Report) , PGT Innovations, Inc. (PGTI - Free Report) and NCI Building Systems, Inc. (NCS - Free Report) . While Continental Building and PGT Innovations sport a Zacks Rank #1 (Strong Buy), NCI carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Continental Building’s earnings for 2018 are expected to increase 50.4%.

PGT Innovations’ 2018 earnings are expected to grow 78.7%.

NCI is expected to record 77.5% earnings growth in fiscal 2018.

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