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Aegion (AEGN) Down 13.5% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Aegion (AEGN - Free Report) . Shares have lost about 13.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Aegion due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Aegion (AEGN - Free Report) Q1 Earnings & Revenues Lag Estimates, Down Y/Y

Aegion Corporation reported first-quarter 2019 results, wherein both earnings and revenues missed the Zacks Consensus Estimate.

Aegion reported adjusted earnings of 6 cents per share, below the consensus estimate and also the year-ago figure of 13 cents by 53.9%. This downside was mainly due to poor segmental performance and adverse weather conditions.

Additionally, total revenues of $277 million lagged the consensus mark of $300 million by 7.7%. The reported figure was also down 14.8% on a year-over-year basis. On the same-store basis, revenues fell 8% due to the expected reduction in large coating project contributions at Corrosion Protection and the turnaround activity at Energy Services.

Operating Highlights

Adjusted gross profit decreased 14.2% from the year-ago level to $52.8 million. Adjusted gross margin of 19.1%, however, improved 20 basis points (bps). This upside was backed by an increased productivity in North American and international Cured-in-place pipe (“CIPP”) operations within Infrastructure Solutions unit.

Adjusted operating income rose 26.3% year over year to $6.5 million. However, adjusted operating margin contracted 40 bps to 2.3% year over year.

Segmental Performance

Infrastructure Solutions’ revenues slipped 2.1% year over year to $131.5 million. While excluding the impact of exited or to-be-exited businesses, revenues inched up 2%, driven by a solid uptick in North America CIPP business along with a fewer impacts of manpower and equipment challenges as compared to the prior-year period.

Adjusted gross and operating margins rose 370 and 450 bps, respectively, during the reported quarter. An 8% reduction in adjusted operating expenses owing to cost-cutting and restructuring initiatives, led to this uptrend.

Segment’s backlog came in at $305.2 million as of Mar 31, 2019, down 12.6% from the corresponding period of 2018.

Revenues in the Corrosion Protection deteriorated 34.3% year over year to $64.5 million. Revenues, excluding the impact of the exited or to-be-exited operations, also dwindled 18% due to loss of contributions from the multiple large coating projects, completed in the prior year. Also, customer-driven delays in both the cathodic protection and industrial linings businesses added to the woes.

Adjusted gross margin contracted 390 bps in the quarter, stemming from a top-line weakness and the unfavorable absorption of fixed costs. Adjusted operating margin shrank a significant 890 bps year over year due to the above-mentioned headwinds.

Backlog in the segment came in at $130.7 million as of Mar 31, 2019. Ending backlog was 16% than the prior-year quarter.

Energy Services segment revenues totaled $80.9 million, down 12.4% year over year. Increased revenues from core maintenance services were offset by declines in the turnaround activity.

The segment’s adjusted gross and operating margin contracted 130 bps and 200 bps, respectively, from the year-ago level due to the lower mix of turnaround activity and higher employer payroll tax obligations.

Backlog in the said segment grew 1.3% to $218.4 million as of Mar 31, 2019.

Financial Update

Aegion’s cash and cash equivalents as of Mar 31, 2019 were $62.5 million, down from $83.5 million at the end of 2018. Net cash used in operations was $6.6 million in first-quarter 2019 compared with net cash of $1.3 million provided by operations in the comparable period of 2018.

Update on Strategic Actions

In 2017, Aegion had embarked on a series of strategic actions targeted to generate more predictable and sustainable long-term earnings growth.

During the first quarter, the company planned to sell its cathodic protection joint venture in Saudi Arabia and the pipeline rehabilitation joint venture in South Africa. Talks are on with third parties for each of the entities and the company expects to complete these transactions by the second half of 2019. While planned divestitures and their exits from the remaining international businesses are likely to be completed by the end of first-half 2019.

The company projects additional cash and non-cash charges from the announced actions to be approximately $12-$16 million in 2019.

2019 Guidance

Aegion expects a modest improvement in adjusted EPS on the back of a strong backlog position and market outlook in its core businesses. It anticipates strong top lines and profitability boosts in Infrastructure Solutions, Energy Services and the cathodic protection business within Corrosion Protection.

The company predicts 1-3% revenue growth in the Infrastructure Solutions business. While minus the effect of the exited or to-be-exited operations, its top line is projected to grow 6-8%, supported by estimated improvements in crew productivity and the project mix within North America CIPP. Adjusted gross margins in the said segment are likely to improve 100-200 bps.

Revenues in the Corrosion Protection unit are anticipated to decline 15-20% year over year. Not counting the impact of the discontinued or to-be-discontinued operations, revenues might slide 3-5%. The reported segment’s adjusted gross margins will probably decline 150-250 bps due to loss of substantial coating services projects.

In Energy Services segment, revenues will possibly fall in the mid-single digit range, thanks to a lower turnaround and construction activities. Adjusted gross margins are forecast to expand in the 50-100 bps band.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 13.33% due to these changes.

VGM Scores

Currently, Aegion has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Aegion has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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