Image Source: Northwest Pipe Company

Northwest Pipe Company (NWPX) specializes in the production of essential water-related infrastructure products. With a strong presence in the market, the company caters to the diverse needs of the steel pressure pipe, concrete, and precast structure industries. Notably, NWPX holds a commanding share of approximately 55% in the expansive steel pressure pipe market, a testament to its unrivaled expertise and quality offerings. As the foremost manufacturer of engineered steel water pipeline systems in North America, NWPX's influence extends beyond steel pressure pipes alone. The company also manufactures a wide range of stormwater and wastewater technology products, high-quality precast and reinforced concrete products, joints, fittings, and specialized components that enhance the overall infrastructure's integrity. NWPX has two distinct operating segments: Engineered Steel Pressure Pipe (SPP) and Precast Infrastructure and Engineered Systems (Precast). The SPP segment holds a dominant position, contributing a substantial 64% to the company's total revenue. Meanwhile, the Precast segment contributes 26% to NWPX's overall financial performance.

Growth Opportunities

NWPX's order book and backlog

Robust bidding activities during the latter half of 2022 have resulted in a strong order backlog for Northwest Pipe Company (NWPX) in 2023. Although the order backlog in the SPP segment for Q1 FY23 stood slightly below the 2022 year-end backlog at $370 million, it surpassed the Q1 FY22 backlog of $341 million, indicating sustained growth. However, the Precast segment witnessed a decline in its order book, totaling $58 million in the quarter compared to $64 million in 2022 and $66 million in Q1 FY22. This decrease can be attributed to a slowdown in the U.S. residential market. Nevertheless, NWPX's exposure to the commercial construction market through ParkUSA products partially offsets the impact of the residential market's weakness.

The demand for NWPX's products remains strong due to various factors, including aging water infrastructure, population growth, drought conditions in certain parts of the U.S., and historical underinvestment in water infrastructure. In addition to healthy demand and a solid order backlog, the company is strategically focused on achieving transformative growth in the precast-related market. This growth is driven by organic expansion, the implementation of the "Product Spread" strategy, and targeted acquisitions.

The "Product Spread" strategy is two-pronged (Level 1 and Level 2). The Level 1 product strategy centers around optimizing capacity utilization at the ParkUSA plants in Texas to maximize overall production capabilities. Notably, the ParkUSA business has made significant progress in expanding NWPX's sales beyond Texas, generating over $8 million in the past 12 months. The Level 2 product spread aims to produce and distribute ParkUSA products from other Northwest Pipe plants. The company is piloting this strategy at its Geneva Precast operations, bidding on new projects, and planning to expand production to other legacy locations once the strategy is firmly established. NWPX is also actively reinvesting in its precast locations, with a particular focus on expanding and automating operations at the Geneva facility. For instance, the company is working on a $16 million project to establish a new RCP (reinforced concrete pipe) manhole facility at its Salt Lake City, Utah, plant, expected to become operational in the fourth quarter of 2023. 

Acquisitions are pursued based on specific criteria, including organic growth potential, strong margins, efficient asset utilization, and positive cash flow profiles. NWPX completed the acquisitions of Geneva Pipe and Precast in January 2020 and ParkUSA in October 2021. The company remains focused on effectively integrating ParkUSA within its existing business structure, ensuring a smooth transition, and capturing the synergies that arise from the consolidation. Once this integration process is successfully completed, NWPX will be well-positioned to explore further opportunities in the market. Currently, NWPX holds a modest but noteworthy market share of approximately 4% in the concrete pipe and precast market. This market presence signifies the company's dedication to expanding its reach beyond its established domains, aiming to increase its influence and market share in the industry. By actively seeking opportunities for growth and strategic acquisitions, NWPX aims to strengthen its position and capitalize on the potential for further expansion in the concrete pipe and precast market.

Furthermore, NWPX aims to maximize its steel pressure pipe water transmission business, where it already holds a significant market share of approximately 55%. While acquisition opportunities are limited in this mature market, the company is well-positioned to participate in the increasing number of water transmission grid infrastructure projects required to support the growing U.S. population. Some notable projects include the Houston Surface Water Program bidding on 3,600 tons of pipe in 2023, the Alliance Regional Water Authority Program in Central Texas bidding for 2,700 tons of pipe, and the Harvest Water Program in the Western market, involving the installation of approximately 25 miles of pipelines for recycled wastewater use in the Sacramento area. In addition, progress continues on the design and permitting of the 150-mile Lake Powell pipeline in Utah, which will serve as an alternative water source for Southern Utah.

In conclusion, I am optimistic about the revenue growth prospects for NWPX in 2023, driven by a robust order backlog and the acquisition of new contracts. Additionally, the upward trend in hot-rolled band steel prices since the beginning of the year should have a positive impact on the company's steel pressure pipe business, further bolstering its financial performance. However, it is important to acknowledge the presence of certain headwinds that may temper these positive factors. The weakness in the residential market, coupled with lower production levels and shipments due to challenges in the ERP implementation at ParkUSA, poses significant challenges. To address these issues, NWPX is actively focusing on employee training and implementing access restrictions within the system.

Despite these near-term hurdles, the long-term prospects for the company remain promising. The persistent need for infrastructure upgrades in the face of aging water infrastructure, coupled with the financial support from the U.S. Infrastructure Investment and Jobs Act (IIJA), positions NWPX for growth. Furthermore, the continuously growing population necessitates increased investments in water infrastructure, which bodes well for the company's long-term success.

Valuation

Created by author using Alpha Spread

In my DCF calculations, I am assuming revenue growth to be negative low single digits in 2023, given the weakness in the residential market and lower production levels, partially offset by a healthy order backlog and new contract awards. Beyond 2023, I have assumed growth to be in the low-single digits, with a terminal growth rate in the low-single digits, as the company will continue to benefit from aging water infrastructure, funding from the IIJA, and population growth. I used a discount rate of 7.53% and arrived at a fair value of $47.14 for NWPX.

Using the relative valuation, if we use a consensus EPS estimate of $2.64 for 2023, we get a price-to-earnings ratio of 10.34x, and if we use a consensus EPS estimate of $2.64 for 2024, we get a price-to-earnings ratio of 10.36x. These values are significantly below the five-year average forward P/E of 21.97x. Taking the FY24 EPS estimate and the average forward P/E, we arrive at a fair value of $58.01 for NWPX. Hence, I have a price target range of $47 to $58 for the company.

Conclusion

In summary, I have a buy rating on the stock despite negative top-line growth in 2023. The reason is, NWPX should benefit from the ongoing need for infrastructure upgrades, supported by the U.S. Infrastructure Investment and Jobs Act (IIJA) and the growing population. These factors provide a favorable long-term outlook for the company. Moreover, NWPX's dominant position in the steel pressure pipe market, combined with its strategic acquisitions and focus on organic growth, further enhances its growth potential. While short-term challenges should impact the stock's performance, investors with a long-term perspective should capitalize on the company's growth opportunities in the water infrastructure industry.