The U.S. government and corporate America have severely underinvested in its infrastructure so far this century. For years, corporations were able to get away with this thanks to “just in time” practices, holding only enough materials to meet current demand

This strategy worked well—until materials stopped arriving on time in 2020 when the pandemic exposed the frail nature of this practice. These disruptions emphasized the importance of resilient supply chains.

The U.S. needs to spend trillions of dollars to upgrade its roads, bridges, factories, and other critical infrastructure as manufacturing returns to American soil.

The result of this endeavor has been increased demand for firms who provide consulting and engineering services for a project’s entire life cycle, like NV5 (NVEE).

NV5 operates three business segments, each crucial for key aspects of today’s investment environment. Infrastructure is the largest segment, accounting for 43% of revenue. This business helps clients with land development, transportation projects, and power delivery.

Building, technology, and sciences (“BTS”) provides consulting services for building construction. It also helps outfit those buildings with plumbing, electric, and HVAC systems. This is NV5’s smallest segment, contributing 27% of total revenue.

Both of these segments have steadily grown in recent years and are set to benefit from supply-chain supercycle tailwinds.

With demand growing for infrastructure consulting, NV5 has made more than two dozen acquisitions since 2017. Most were small purchases that added to the company’s capabilities without being a burden to integrate.

However the company notably spent $318 million in 2019 to acquire geospatial leader Quantum Spatial, making NV5 the top provider of geospatial data in the U.S. Quantum relies on sonar and drone technology that helps people find the most suitable land for buildings.

Its services are also essential for coastal management and vegetation growth monitoring. NV5 followed up its Quantum acquisition with four more purchases, including a geospatial business from defense contractor L3Harris Technologies (LHX).

Geospatial solutions was NV5’s smallest segment when it was first established. Today it’s the second largest, accounting for 30% of sales.

Geospatial analysis contributes essential data for complicated projects, making NV5 an integral part of these projects, which is why 96% of this segment’s revenue is recurring.

This, along with the segment’s subscription software that allows customers to monitor their geography once a project is completed has created a business that is more profitable than NV5’s two legacy business units.

Prior to NV5’s 2019 acquisition, the company’s Uniform return on assets (“ROA”) hovered around 20% levels. Since then returns have improved to above 30%.

NV5’s three business units have made it a turnkey consultant for a wide range of infrastructure projects which are poised for continued growth as the U.S. continues to increase its infrastructure spending.

Yet investors are doubting this company’s ability to sustain recent performance, with its shares trading below historical levels at 13.2x Uniform P/E ratio today.

This valuation suggests the market is concerned that elevated interest rates could deter infrastructure investment, and lack confidence in NV5’s ability to continue winning contracts amid supply chain investment tailwinds.

We can see what the market thinks 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 NV5’s Uniform ROA to decline to around 18% from 31% last year.

Wall Street analysts understand the importance of NV5 for construction projects aimed at renovating and building new manufacturing facilities as well as data centers at the foundation of the AI revolution.

These analysts project sustained 30%-plus returns for the company over the next two years.

NV5 is a different business today than it was six years ago. In addition to the Quantum acquisition boost, the company is seeing much stronger growth opportunities thanks to growing supply chain investments.

This is a higher-margin company than it was in the past, with tailwinds that should continue to propel it for years to come.

Given the company’s recent performance improvements and market tailwinds, current valuations suggest there is upside potential for shareholders.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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