Infrastructure is a multitrillion-dollar industry worldwide, yet it gets relatively little analyst coverage. In this Industry Focus clip, Motley Fool writer Jason Hall gives his pitch for NV5 (NASDAQ:NVEE) Global, a small engineering infrastructure consulting company that could see massive growth in the long term.
Listen in to find out more about this under-covered industry, how NV5 Global has an edge up on the competition, just how huge the potential runway for NV5 is in the next few years and decades, how this industry is recession-proof, and more.
A full transcript follows the video.
This video was recorded on Oct. 19, 2017.
Jason Hall: I'm Jason Hall. I've been a writer for The Motley Fool for about five years. I cover energy, different industrials, that sort of thing. I've found myself really interested over the past few years looking at some of the more secular growth plays.
A company that I found and I think is really interesting right now is NV5 Global. It's a small engineering infrastructure consulting company. It's an interesting opportunity for a couple of reasons. No. 1, if you think about, from a national basis, in the U.S., we need to spend something like $800 billion a year on infrastructure, modernization, and competitive investment to be competitive with the rest of the world over the next 25 years. On a global basis, this is a $3 trillion annual industry. Most of that money goes into the steel and concrete and that sort of stuff. But the companies that design the projects and manage the implementation and provide consulting services are really important.
NV5 Global is going to do about $350 million in sales this year, so it's really small. The founder of the company, Dickerson Wright, has a really great track record in this industry of building businesses through acquisition and organic growth. He's a major shareholder, he holds 10% of the company, so he's really invested. So you have a founder-led business with a really great track record.
And it's a relatively expensive stock. It trades 40 times trailing earnings. It's cheaper, you look at it on a forward basis, trading for around 30 times there, management's projections for 2017's earnings. But you're looking at $350 million in sales, and a multibillion-dollar global industry, multitrillion-dollar global business. It's a really great opportunity, I think, to invest in this company right now.
Sarah Priestley: So Kristine, what did you make of Jason's pitch?
Kristine Harjes: Unlike GM, I had never heard of this company.
Priestley: Me either.
Harjes: And honestly, prior to researching for this episode, I knew very little about infrastructure at all. In case our listeners are starting from scratch like I was, infrastructure is this category that's all about the physical and the organizational structure that's needed for the operation of a society. Things like buildings, roads, sewage, water, energy and power, communication, all that sort of things.
NV5 primarily focuses on five business verticals. They had construction quality assurance, infrastructure engineering, support services, energy program management, and environmental solutions. There are more than 100,000 engineering and infrastructure consulting firms in the U.S., so NV5 is not even close to being alone in what it does, but they seem to stand out from their competitors for three reasons. They have a proven management track record, they have a very smart, acquisitive strategy, and they have a large insider ownership stake.
Priestley: Yeah, absolutely. The insider-ownership stake is something that we look for in a look for in a lot of companies, that the employees have skin in the game. They're the 60th largest engineering firm in the U.S., ranked by Engineering News. So yes, this is a hugely fragmented industry. But the opportunity, which is really what Jason is focusing on in his pitch, is undoubtedly huge. I think last year, 2016, global spending on infrastructure was $3.1 trillion. That's massive. And as he rightly said, a lot of the spending of that is going on to the physical aspects. The concrete you need, the steel you need, everything else. But a proportion is also going to the engineers and consulting. So a small slice of that pie, even, is massive.
Harjes: Yeah, absolutely. This is a growth stock for sure. It's up something like 7x since its 2013 IPO. It was recently ranked as 13th on Fortune magazine's 100 fastest-growing companies list in 2017. The opportunity in front of them is absolutely incredible. I mentioned earlier their acquisitive history. They were able to grow its geographical and also its technological reach by snapping up some of these other competing companies. They've acquired more than 20 different companies since their founding, and if they continue to pursue that strategy, they should be able to really take a hold of this global market with a very strong macro-trend behind it.
Priestley: Absolutely. The macro-trend is really your main thesis, I would think, to buy this company. Infrastructure engineering isn't driven by economic cycles, so no matter what the economy is doing, we still need water to drink, we still need our waste treated, unfortunately, and we still need bridges to get over places.
Harjes: In particular, I'll add that it's a trend that's very much supported by demographics. You are probably going to see the global middle class roughly double over the next 30 years, according to various estimates, and the majority of these people are going to live in cities, where, in particular, you need this sort of investment.
Priestley: Absolutely. One thing I would like to know more about with the company is, they have 100 different global locations, but how much are they centered in China? Because China is going to be huge. They spent the most on infrastructure last year, two and a half times the next person on the list, which was Western Europe. So I think it was important to have a look at how much they're operating there.
And then, also, to just be aware that this is a hugely expensive stock at the moment. Its price-to-earnings is 41. Obviously, there's a lot of competitors. One of the biggest ones is probably Chicago Bridge & Iron, that's a public company that people could reference against. They're in for some trouble at the moment, so maybe this is another play you can look at if you're interested in that industry. Anything else you would like to add?
Harjes: I'll again reiterate that this is absolutely a growth stock. It's very expensive, but it's fairly small right now. The market cap is somewhere in the $580 million range, which is pretty tiny, particularly when you think about the numbers that are in the high hundred trillions associated with his global market.