Founded in 1985, Houston, Tex.-based ENGlobal Corporation (ENG - Get Rating) is an energy and automation services provider that operates through engineering, procurement, and construction (EPCM) and automation segments in the United States and internationally. Shares of ENG have soared 193.6% over the past year on investors’ growing optimism about r the clean energy sector’s prospects.

But as a result of operational restrictions caused by the COVID-19 pandemic, the company’s business development efforts were significantly hampered. ENG saw a 39.1% year-over-year decline in commercial revenue in the first quarter of 2021, and its  stock price has dipped 28.1% over the past three months.

Although the company’s efforts to deliver innovative Haldor Topsoe technology to its customers in the United States could expand its market reach significantly, its weak financials pose a major risk to its  prospects. ENG  recorded significant losses in its  last reported quarter.

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Here is what we think could influence ENG’s performance in the near term:

Weak Growth History

ENG’s revenue has declined at a 4.2% CAGR  over the past five years. Although its total assets have increased at a 5.7% annualized rate of 5.7% over the past three years, the company’s tangible book value has declined at an 8.8%  CAGR over this period.

Bleak Financials

ENG’s total revenue for the first quarter, ended March 27, 2021, was $12.45 million, representing a 35.4% year-over-year decline. This can be attributed primarily  to a decline in spending by its client base. The  company’s government services revenue declined 12.7% from its year-ago value to $2.4 million. Its operating loss came in at $1.56 million, compared to $1.13 million in  operating income in the first quarter of 2020. Also, ENG’s net income declined 95.8% from the prior-year quarter to $46,000. The company’s gross profit decreased by 69.2% year-over-year to $1.0 million over this period.

Also, ENG’s $1.24 million in cash flow from operations is 99.6% lower than the $293.40 million industry average. Its 10.8% trailing-12-month gross profit margin is 72.7% lower than the 39.4% industry average. ENG’s trailing-12-month net income margin stands at negative 2.9%, and the company’s ROE, ROA and ROTC are negative 11.6%, 5.5% and 9.5%, respectively.

Stretched Valuation

In terms of trailing-12-month Price/Book, ENG is currently trading at 6.50x, which is 290.8% higher than the 1.66x industry average. And its 91.37 trailing-12-month Price/Cash flow multiple is significantly higher than the 7.20 industry average.

POWR Ratings Reflect Bleak Prospects

ENG has an overall D rating,  which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. ENG has a D grade for Stability and Growth. The stock has a 2.34 five-year-monthly beta, which is consistent with its Stability grade. And its gloomy growth prospects are in sync with the Growth grade.

The company has a Value grade of D, reflective of its higher-than-industry valuation multiples.

In addition to the grades we’ve highlighted, one can check out additional ENG ratings for Sentiment, Quality, and Momentum here. ENG is ranked #83 of 85 stocks in the B-rated Industrial – Services industry.

Click here to view the top-rated stocks in the Industrial – Services industry.

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Bottom Line

ENG’s innovative renewable solutions have  helped the company add established technology and construction concerns  to its list of clients. However, temporary operational restrictions and factory closures because of the pandemic have negatively impacted the company’s top- and bottom-line performance. Also, its bleak growth prospects do not justify its current valuation. Thus, we think the stock is best avoided now.

ENG shares were trading at $2.99 per share on Tuesday morning, down $0.24 (-7.43%). Year-to-date, ENG has declined -6.56%, versus a 16.09% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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