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Construction and construction materials company Granite Construction (NYSE:GVA) announced better-than-expected results in Q2 CY2024, with revenue up 20.5% year on year to $1.08 billion. The company's full-year revenue guidance of $3.95 billion at the midpoint also came in 1.2% above analysts' estimates. It made a non-GAAP profit of $1.73 per share, improving from its loss of $0.38 per share in the same quarter last year.
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Granite Construction (GVA) Q2 CY2024 Highlights:
- Revenue: $1.08 billion vs analyst estimates of $1.01 billion (7.3% beat)
- EPS (non-GAAP): $1.73 vs analyst estimates of $1.39 (24.9% beat)
- The company lifted its revenue guidance for the full year from $3.9 billion to $3.95 billion at the midpoint, a 1.3% increase
- Gross Margin (GAAP): 15.2%, up from 11.5% in the same quarter last year
- Free Cash Flow of $92.74 million is up from -$3.80 million in the previous quarter
- Market Capitalization: $3.02 billion
Having played a role in the construction of the Hoover Dam, Granite Construction (NYSE:GVA) is a provider of infrastructure solutions for roads, bridges, and other projects.
Construction and Maintenance ServicesConstruction and maintenance services companies not only boast technical know-how in specialized areas but also may hold special licenses and permits. Those who work in more regulated areas can enjoy more predictable revenue streams - for example, fire escapes need to be inspected every five years–. More recently, services to address energy efficiency and labor availability are also creating incremental demand. But like the broader industrials sector, construction and maintenance services companies are at the whim of economic cycles as external factors like interest rates can greatly impact the new construction that drives incremental demand for these companies’ offerings.
Sales GrowthA company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one tends to grow for years. Unfortunately, Granite Construction's 2.3% annualized revenue growth over the last five years was weak. This shows it failed to expand in any major way and is a rough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Granite Construction's annualized revenue growth of 6.2% over the last two years is above its five-year trend, but we were still disappointed by the results.
This quarter, Granite Construction reported remarkable year-on-year revenue growth of 20.5%, and its $1.08 billion of revenue topped Wall Street estimates by 7.3%. We also like to judge companies based on their projected revenue growth, but not enough Wall Street analysts cover the company for it to have reliable consensus estimates.
Operating MarginOperating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling them, and, most importantly, keeping them relevant through research and development.
Granite Construction was roughly breakeven when averaging the last five years of quarterly operating profits, inadequate for an industrials business. This result isn't too surprising given its low gross margin as a starting point.
On the bright side, Granite Construction's annual operating margin rose by 5.2 percentage points over the last five years
This quarter, Granite Construction generated an operating profit margin of 7.9%, up 4.7 percentage points year on year. This increase was encouraging, and since the company's operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as sales, marketing, R&D, and administrative overhead.
EPSAnalyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Granite Construction's full-year EPS flipped from negative to positive over the last four years. This is encouraging and shows it's at a critical moment in its life.
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. Granite Construction's EPS grew at an astounding 231% compounded annual growth rate over the last two years, higher than its 6.2% annualized revenue growth. This tells us the company became more profitable as it expanded.
We can take a deeper look into Granite Construction's earnings quality to better understand the drivers of its performance. Granite Construction's operating margin has expanded 4.4 percentage points over the last two years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.
In Q2, Granite Construction reported EPS at $1.73, up from negative $0.38 in the same quarter last year. This print easily cleared analysts' estimates, and shareholders should be content with the results. We also like to analyze expected EPS growth based on Wall Street analysts' consensus projections, but there is insufficient data.
Key Takeaways from Granite Construction's Q2 Results We were impressed by how significantly Granite Construction blew past analysts' revenue and EPS expectations this quarter. We were also excited it raised its full-year revenue guidance. Zooming out, we think this was a great quarter that shareholders will appreciate. The stock remained flat at $68.46 immediately following the results.
