A premier container-based solutions provider, SG Blocks, Inc. (SGBX - Get Rating) in Brooklyn, N.Y., designs and manufactures purpose-built modules for commercial, industrial, and residential building construction in the United States. SGBX’s stock has declined 43.7% in price over the past year and 23.4% over the past six months, with growing investor pessimism surrounding its debt load.

Closing its last trading session at $2.49, SGBX’s stock is trading 55.8% below its 52-week high of $5.63. Furthermore, SGBX is currently trading lower than its 200-day moving average of $2.92, which indicates a downtrend.

Although a growing number of distribution and manufacturing agreements with top-tier clients could drive further growth for the company, as global supply chains continue to take a beating amid the Russia-Ukraine war, delays in deliveries and increased costs could negatively impact its revenue and operations. While its engineering services revenue has shrunk, its profit margin has remained negative. Given the high losses and expenses incurred by the company in its last reported quarter, we think the stock could suffer a pullback in the near term.

Here is what could influence SGBX’s performance in the near term:

Business Headwinds

Delays in deliveries and cost-overruns in commercial projects and disruptions to SGBX’s suppliers and their contract manufacturers could negatively impact its revenue and results of operations. In addition, as ongoing supply-chain disruptions continue, the company’s inability to obtain materials in the volumes required and at competitive prices could adversely affect its manufacturing capabilities and hence, provide products in a timely manner. With geopolitical conflicts showing no signs of resolution, severe labor disruptions and shipping delays could be a significant headwind in SGBX’s business.

Selling Property to Reduce Debt Burden

This month, SGBX’s wholly owned subsidiary SGB Development Corp listed its 58-acre waterfront property for sale at $15 million. The company selected real estate company Douglas Elliman Inc. as the broker for its waterfront Lago Vista property. SGBX expects to eliminate a portion of its debt without issuing new shares. However, selling the property could lead to negative investor sentiment in the stock.

Unimpressive Financials and Profitability

SGBX’s engineering services revenue was $82,230, representing a 13.9%  year-over-year decrease of 13.9% in the third quarter ended September 30, 2021. Furthermore, the company’s gross profit came in at $105,000, compared to $195,000 in the third quarter of 2020. SGBX’s operating loss increased 78.8% year-over-year to $2.72 million. Also, it reported a $3.83 net loss up significantly from the year-ago value. 

The company’s trailing-12-month EBITDA margin, net income margin, and levered free cash flow are negative 12.8%, 24.3%, and 12.6%, respectively. Also, SGBX’s 15.5% trailing-12-month gross profit margin is 46.9% lower than the 29.1% industry average. And its trailing-12-month ROA and ROE are negative 36.3% and 57.5%, respectively. 

POWR Ratings Reflect Bleak Prospects

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

Our proprietary rating system also evaluates each stock based on eight distinct categories. SGBX has an F grade for Quality. This is reflective of the stock’s weak profitability. 

The company has a Value grade of C, which is in sync with its trailing-12-month Price/Cash Flow ratio of 55.95x, which is 260.6% higher than the industry average of 15.52x. Also, it has a D grade for Growth, which is consistent with SGBX’s weak growth potential and financials.

In addition to the grades we have highlighted, one can check out additional SGBX ratings for Sentiment, Stability, and Momentum here. SGBX is ranked #53 of 54 stocks in the B-rated Industry – Building Materials industry.

Click here to check out our Industrial Sector Report for 2022

Bottom Line

Even though the growing roster of commercial projects with top companies has helped SGBX make strong progress across all its verticals, the cargo shipping containers manufacturer remains unprofitable. Given that supply disruptions and labor shortages are expected to continue, it is no surprise that the company’s growth prospects look bleak. So, we think its shares are best avoided now.

How Does SG Blocks, Inc. (SGBX) Stack Up Against its Peers?

While SGBX has an overall F (Strong Sell) rating in our proprietary rating system, one might want to check out its industry peers, Huttig Building Products, Inc. (HBP - Get Rating) and Chase Corporation (CCF - Get Rating), with an A (Strong Buy) rating.

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