The conflict in Ukraine sent shockwaves throughout the global energy landscape, with repercussions spanning far beyond the borders of the embattled nation.

Western nations swiftly reassessed their energy supply chains, realizing the vulnerability of their dependence on Russian sources, with 40% of European Union gas demand being supplied by Russia.

In response, they began shifting away from these sources, disrupting established energy trade routes and leading to abrupt supply shortages.

Russia is a giant in the oil and gas space. It produced 14% of the world’s crude oil supply and 8% of the liquid natural gas supply in 2021. Consequently, it is not easy to move away from it.

Searching for other sources means longer distances and higher energy prices, which is exactly what happened. It led to a domino effect across industries.

The exponential rise in energy costs bore down heavily on businesses, ranging from manufacturing to transportation and travel.

With costs spiraling out of control, many enterprises found themselves grappling with a pressing challenge: how to adapt to this volatile energy landscape.

Companies that were ill-prepared to navigate this energy crisis saw their profit margins shrink, and some even faced the grim possibility of shutting down operations.

Amidst this troubling environment, Willdan (WLDN) emerged as a game-changer.

The company offers consulting services aimed at optimizing energy costs and reducing demand.

Willdan began collaborating with companies across industries to devise tailor-made strategies that would help them weather the storm.

Willdan’s consulting approach is multifaceted. It involves energy audits, during which the company assesses the energy consumption patterns of its clients and identifies potential areas for optimization. This could range from implementing energy-efficient technologies to streamlining operational processes.

By reducing energy demand without compromising output quality, Willdan assists companies in effectively navigating the energy cost crisis.

However, the market doesn’t seem to understand how essential its services are.

We can see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s ROA to stay at rock bottom 10% levels. For context, part of the reason ROA fell to 10% in 2022 was just how fast the company was growing.

Over the next two years, its returns are already forecast to rebound above 15%.

The market’s pessimistic expectation is caused by faltering financials. However, the market seems to not be aware of factors that make Willdan great…

As energy prices continue to hover at elevated levels, the demand for Willdan’s services remains robust.

The persistent volatility of the energy market underscores the necessity for businesses to have a reliable partner in optimizing their energy expenditures.

Willdan’s track record of successful interventions during times of crisis positions it as a trusted ally for industries seeking stability and cost-effective solutions.

As the energy crisis continues, companies will need more of Willdan’s services, meaning higher demand for Willdan and an upside potential for its investors…

SUMMARY and Willdan Group Tearsheet

As the Uniform Accounting tearsheet for Willdan Group (WLDN:USA) highlights, the Uniform P/E trades at 15.9x, which is below its global corporate average of 18.4x and its historical P/E of 26.4x.

Low P/Es require low EPS growth to sustain them. In the case of Willdan Group, the company has recently shown a 42% shrinkage in Uniform EPS.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Willdan’s Wall Street analyst-driven forecast is a 118% EPS growth in 2023 and a 10% EPS growth in 2024.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Willdan’s $21.99 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow 6% annually over the next three years. What Wall Street analysts expect for Willdan’s earnings growth is above what the current stock market valuation requires through 2024.

Furthermore, the company’s earning power is 2x its long-run corporate average. Moreover, cash flows and cash on hand are below its total obligations—including debt maturities, capex maintenance, and dividends.Also, the company’s intrinsic credit risk is 1200bps above the risk-free rate.

All in all, this signals high credit risk.

Lastly, Willdan’s Uniform earnings growth is above its peer averages but in line with its average peer valuations.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

The Uniform Accounting insights in today’s issue are the same ones that power some of our best stock picks and macro research, which can be found in our FA Alpha Daily newsletters.