BUSINESS
Orion Group Holdings, Inc. operates as a specialty construction company in the building, industrial, and infrastructure sectors in the continental United States, Alaska, Canada, and the Caribbean Basin. It operates in two segments, Marine and Concrete. The company’s marine construction services include construction, restoration, dredging, maintenance, and repair of marine transportation facilities and pipelines, bridges and causeways, and marine environmental structures. Its marine transportation facility projects comprise public port facilities for container ship loading and unloading; cruise ship port facilities; private terminals; special-use navy terminals; recreational use marinas and docks; and other marine-based facilities.
INVESTMENT RATING
ORN’s future returns on capital are forecasted to be in line with the cost of capital. Accordingly, the company is expected to be Value Creation neutral.
Orion Group Holdings has a current Value Trend Rating of B (Positive).
The Value Trend Rating reflects very contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. Orion Group Holdings has a slightly negative Appreciation Score of 33 but a very high Power Rating of 89, triggering the Positive Value Trend Rating.
Orion Group Holdings’ stock is selling above targeted value. The current stock price of $4.90 compares to targeted value 12 months forward of $4.
This moderately low appreciation potential results in an appreciation score of 33 (67% of the universe has greater appreciation potential.)
Orion Group Holdings has a Power Rating of 89. (This very high Power Rating indicates that ORN has a higher likelihood of achieving attractive investment performance over the near to intermediate term than all but 11% of companies in the universe.)
Factors contributing to this very high Power Rating include: the recent trend in ORN’s earnings estimates has been extremely favorable; and recent price action has been extremely favorable. An offsetting factor is is in a slightly weakened position current.
INVESTMENT PROFILE
ORN’s financial strength is below average. Financial strength rating is 33.
Relative to the S&P 500 Composite, Orion Group Holdings Inc has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that ORN is higher risk. High expected growth is a positive for ORN. Low historical profitability is a relative weakness for ORN. ORN’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. ORN has unusually low market capitalization.
CURRENT SIGNALS
Orion Group Holdings’ current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.
Orion Group Holdings’ current technical position is neutral. The stock price is in a 0.7 month down move. The stock has declined 15.9% from its prior high. The 200 day moving average is in an uptrend. The stock price is below its 200 day moving average.
ALERTS
Orion Group Holdings Inc (NYSE: ORN) has benefited from notable positive changes in investment behavior: the stock rose on very heavy volume.
Positive development: the stock’s power rating rose above 70. Negative development: significant quarterly earnings deceleration occurred.
In light of this we are reviewing our current Overall Rating of B. This review will be completed in the next several days.
Orion Group Holdings Inc (NYSE: ORN) stock enjoyed a major increase of 11.4% on 10/31/19. The shares closed at $4.90. Moreover, trading volume in this advance was exceptionally high at 458% of normal. The stock has been exceptionally strong relative to the market over the last nine months and has risen 7.5% during the last week.
CASH FLOW
In 2018, Orion Group Holdings experienced a decrease in cash of -$0.40 million (-4%). Sources of cash were very modestly less than uses. Cash generated from 2018 EBITDA totalled +$14.76 million. Non-operating uses consumed -$83.84 million (-568% of EBITDA). Cash taxes consumed -$0.96 million (-7% of EBITDA). Withdrawal of investment from the business totalled +$69.15 million (+469% of EBITDA). On a net basis, debt investors pulled out -$4.26 million (-29% of EBITDA) while equity investors furnished +$4.74 million (+32% of EBITDA).
ORN’s Non-operating Income, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Orion Group Holdings Inc Peer Group. (Since 2016 Non-operating Income, %EBITDA has accelerated very sharply.) In most years, Orion Group Holdings was in the second quartile and top quartile. Currently, Orion Group Holdings is lower quartile at -568% of EBITDA (-$83.84 million).
ORN’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Orion Group Holdings Inc Peer Group. In most years, Orion Group Holdings was in the top quartile and third quartile. Currently, Orion Group Holdings is at the lower quartile at -7% of EBITDA (-$0.96 million).
ORN’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Orion Group Holdings Inc Peer Group. (Since 2015 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Orion Group Holdings was in the third quartile and top quartile. Currently, Orion Group Holdings is upper quartile at +469% of EBITDA (+$69.15 million).
ORN’s Debt Investors, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Orion Group Holdings Inc Peer Group. In most years, Orion Group Holdings was in the third quartile and top quartile. Currently, Orion Group Holdings is below median at -29% of EBITDA (-$4.26 million).
ORN’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Orion Group Holdings Inc Peer Group. (Since 2015 Equity Investors, %EBITDA has experienced a very sharp recovery.) In most years, Orion Group Holdings was in the top quartile and second quartile. Currently, Orion Group Holdings is upper quartile at +32% of EBITDA (+$4.74 million).
ORN’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Orion Group Holdings Inc Peer Group. In most years, Orion Group Holdings was in the top quartile and lower quartile. Currently, Orion Group Holdings is substantially below median at -3% of EBITDA (-$0.40 million).
ORN’s Cash, %Revenue has suffered a strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Orion Group Holdings Inc Peer Group. (Since 2016 Cash, %Revenue has experienced a small recovery.) In most years, Orion Group Holdings was in the top quartile and third quartile. Currently, Orion Group Holdings is below median at +2%.
PROFITABILITY
ORN’s return on equity has eroded very significantly since 2009 accelerating very sharply after the 2017 level.
The key to the story for ORN is a very strong negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors.
The productivity of ORN’s assets rose over the full period 2009-2019: asset turnover has enjoyed a very strong overall uptrend.
More than offsetting this trend, however, pretax margin experienced a very strong overall downtrend even as it recently stabilized from the 2016 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
ORN’s return on equity is lower quartile (-83.1%) for the four quarters ended June, 2019.
Operating performance (pretax return on assets) is lower quartile (-34.5%) reflecting asset turnover that is slightly below median (1.53X) and lower quartile pretax margin (-22.5%).
Tax “keep” rate (income tax management) is at median (88.1%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is at median (2.73X).
GROWTH RATES
There are no significant differences between Orion Group Holdings’ longer term growth and growth in recent years.
Orion Group Holdings’ historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.
Annual revenue growth has been 7.6% per year.
Total asset growth has been 2.7% per year.
Annual E.P.S. growth has been -42.7% per year.
Equity growth has been -5.1% per year.
No consensus growth rate forecast is available for Orion Group Holdings.
Relative to the Orion Group Holdings Inc Peer Group, Orion Group Holdings’ historical growth measures are erratic. Revenue growth (7.6%) has been at the upper quartile. Total asset growth (2.7%) has been below median. Equity growth (-5.1%) has been substantially below median. E.P.S. growth (-42.7%) has been lower quartile.
Consensus growth forecast is unavailable.
PRICE HISTORY
Over the full time period, Orion Group Holdings’ stock price performance has been variable and significantly below market. Between December, 2008 and October, 2019, Orion Group Holdings’ stock price fell -49%; relative to the market, this was a -85% loss. Significant price moves during the period: 1) July, 2018 – May, 2019: -73%; 2) May, 2016 – January, 2017: +125%; 3) March, 2014 – February, 2016: -71%; 4) September, 2011 – July, 2013: +118%; and 5) July, 2009 – September, 2011: -74%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 3.8% is substantially below median relative to the S&P 500 Composite.
In addition to being substantially below median relative to S&P 500 Composite, current annual total return performance through October, 2019 of 3.8% is above median relative to Orion Group Holdings Inc Peer Group.
Current 5-year total return performance of -14.9% is lower quartile relative to the S&P 500 Composite.
Through October, 2019, with lower quartile current 5-year total return of -14.9% relative to S&P 500 Composite, Orion Group Holdings’ total return performance is below median relative to Orion Group Holdings Inc Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, ORN’s overall valuation is normal. The highest factor, the ratio of enterprise value/assets, is lower quartile. Price/equity ratio is lower quartile. Ratio of enterprise value/revenue is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
Orion Group Holdings has a major value gap compared to the median valuation. For ORN to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.45X to 0.60X. If ORN’s ratio of enterprise value/revenue were to rise to 0.60X, its stock price would be lower by $3 to $8.
For ORN to hit lower quartile valuation relative to the Orion Group Holdings Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 0.45X to 0.37X. If ORN’s ratio of enterprise value/revenue were to fall to 0.37X, its stock price would decline by $-2 from the current level of $4.90.
VALUE TARGETS
ORN’s future returns on capital are forecasted to be in line with the cost of capital. Accordingly, the company is expected to be Value Creation neutral.
Orion Group Holdings’ current Price Target of $4 represents a -9% change from the current price of $4.90.
This moderately low appreciation potential results in an appreciation score of 33 (67% of the universe has greater appreciation potential.)
Notwithstanding this moderately low Appreciation Score of 33, the high Power Rating of 89 results in an Value Trend Rating of B.
Orion Group Holdings’ current Price Target is $4 (-40% from the 2018 Target of $7 and -9% from the 10/31/19 price of $4.90). This dramatic fall in the Target is the result of a +3% increase in the equity base and a -42% decrease in the price/equity multiple. The forecasted decline in return on equity has a very large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a slight negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a slight positive impact.
PTR’s return on equity forecast is 4.6% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is well below the 2010 peak of 10%.
PTR’s growth forecast is 4.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, variable decline between 2010 and 2018. The current forecast is significantly below the 2010 peak of 21%.
PTR’s cost of equity forecast is 5.0% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2010 and 2018. The current forecast is below the 2010 peak of 8.2%.
At Orion Group Holdings’ current price of $4.90, investors are placing a negative value of $-2 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 3.0% per year, and a return on equity of 6.3% versus a cost of equity of 4.8%.
PTR’s 2020 Price Target of $4 is based on these forecasts and reflects an estimated value of existing assets of $5 and a value of future investments of $-0.
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