Willdan Group’s (WLDN) Strong Growth Forecast Overshadowed By A Spiraling Stock Market

Investors are reacting pretty negatively to the yearend results released by Willdan Group (WLDN) last night. The provider of professional and technical services to the energy market reported net revenue (excludes subcontractor services and other costs that are passed on directly to customers) in the final quarter of 2022 jumped 24.5% year-over-year to $64.6 million. While this was largely in line with the $64.8 million that analysts were expecting and driven by the ramping in the company’s California IOU programs, adjusted earnings of 36 cents per share were down 23.4% and missed their 45 cents consensus estimate.

Yet as disappointing as this profit shortfall appears, it was largely the product of a much higher effective tax rate, which I estimate was 42.3% versus just 15.5% in Q4 of 2021 due to numerous non-recurring tax items impacting both periods, including the benefits provided by the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) on last year’s rate. In fact, relative to WLDN’s guidance—which implied net revenue and adjusted EBITDA as low as $59.7 million and $10.7 million in Q4—these results compare quite favorably with the $11.8 million in adjusted EBITDA the company achieved up 25.1% from the prior year and 47.6% sequentially thanks to the increasing profitability on its IOU contracts. Thus, its high tax bill—which isn’t likely to persist given the lower tax rate of 27% projected for 2023—shouldn’t take away from the fact that WLDN’s margin performance improved dramatically just as it was expecting.

More importantly, the company sees $242-247 million in net revenue and $35-39 million in adjusted EBITDA for 2023. At the midpoint, the latter reflects strong growth of approximately 59% from the $23.3 million produced in 2022 and implies a significant expansion in WLDN’s adjusted EBITDA margin to about 12.6% from just 10.3% last year. This is also expected to yield adjusted earnings of $1.24-1.32 per share—the midpoint of which is 4 cents higher than the consensus view.

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It’s important to note, however, that a recent amendment to WLDN’s IOU contract with Southern California Edison (SCE) will contribute to this margin improvement by meaningfully reducing the high ramp-up costs WLDN has continued to incur and driving substantially better and smoother profitability overall (especially early on). However, this comes at a high price since the amendment also significantly decreased the size of the contract. And with the latter likely to result in lower-than-expected profit contributions from the contract longer out even at the higher margin profile, WLDN’s growth prospects have taken a slight hit in our view.

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That said, WLDN’s outlook both in 2023 and beyond remains very favorable. Specifically, while the net revenue of approximately $245 million implied by its guidance is lower than the $267.2 million analysts were projecting due to the reduced revenue now expected from the SCE contract, it still reflects strong growth of about 8% from 2022. And the midpoint of its adjusted earnings forecast of $1.28 per share indicates even better growth of 45% from the 88 cents realized last year.

Not many companies are forecasting such growth for 2023. And even less have the level of confidence to deliver on it that I believe WLDN has from the fact that almost all of the work expected to drive this growth is either under contract or firmly in the company’s backlog. Thus, I believe today’s post-earnings slide in the stock—which had already closed at its lowest level of the year and was down more than 20% from its early February high just prior to this quarterly report—is more the result of today’s significant market weakness, which is hitting small-caps especially hard. But with it now trading at just 12 times the company’s earnings forecast for the year and at a sizable discount to an S&P 500 that’s still selling at nearly 18 (yet is projected to see earnings rise only 2.3%), I think it offers incredible value that will be tough for the market to continue to ignore much longer.