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Why Shares of Granite Construction Are Crumbling Today

By Lou Whiteman - Oct 25, 2019 at 11:13AM

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Issues relating to overruns at large civil projects continue to weigh on results.

What happened

Shares of Granite Construction ( GVA -1.88% ) lost more than 35% of their value on Friday morning after the general contractor and construction materials provider reported quarterly results that fell well below expectations. Issues with the company's heavy civil construction unit continue to plague the stock, which has now lost nearly half of its value this year.

So what

Before markets opened on Friday, Granite reported third quarter adjusted earnings of $0.58 per share on revenue of $1.1 billion, falling well short of analyst expectations for $1.44 per share in earnings and missing revenue estimates by about $60 million. CEO James H. Roberts said in a statement that overall business conditions in the quarter were strong, aided by good weather and solid public-sector infrastructure funding, but contract disputes in Granite's heavy civil division weighed on performance.

"During the third quarter, strong core operational performance was dampened by a negative contribution from the heavy civil operating group primarily driven by disputed work," Roberts said. "As we restore balance in heavy civil, a critical piece of the puzzle is resolution of ongoing disputes which continue to have a distorted impact on our cash flows and earnings."

Heavy equipment operating at a construction site.

Image source: Getty Images.

In late July, Granite announced it would conduct a strategic review of the heavy civil division because charges related to issues at key projects were eating into earnings. Granite said at the time the charges stem from four projects bid between 2012 and 2014 that have experienced increased project completion costs. The company revealed no further details; however, Roberts said during the company's first-quarter earnings call back in April that large projects "tend to always have some type of dispute."

The review is now complete, and Granite said it has overhauled the division's management and is "aggressively pursuing dispute avoidance and resolution." The company also hopes to cap the division to no more than 15% of overall revenue and intends to implement a refined approach to risk mitigation.

"A critical component of our current and future success is consistent performance on projects at scale, in this case projects typically in a range of about $100 million to $500 million, with particular emphasis on best-value procurements with more defined design and appropriate risk-sharing," Roberts said. "With that said, the vast majority of Granite's robust project pipeline is comprised of projects well below this level, reflecting our deliberate focus on de-risking our portfolio."

Now what

Granite sees a turnaround in 2020, forecasting mid-single-digit revenue growth and adjusted EBITDA margins of 6.5% to 8.5%. But investors, based on the stock's reaction on Friday, are taking a wait-and-see approach.

There's value in Granite's business and a significant need for infrastructure investment in the United States. But given the uncertainties surrounding conflict resolution and the ongoing threat of the U.S. falling into a recession and large-scale projects being put on hold as a result, it is understandable that investors, for now, would rather watch this one from the sidelines.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Granite Construction Incorporated Stock Quote
Granite Construction Incorporated
$38.15 (-1.88%) $0.73

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