Global Power Equipment Group Growth Plan Continues to Progress Despite Lower Near-Term Earnings Expectations

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Global Power reported fourth-quarter results that were essentially in line with our expectations and provided a 2014 outlook that was modestly lower than the company’s initial forecast. Nonetheless, in 2014, we expect Global Power to further integrate and leverage its recent acquisitions, driving revenue and earnings growth despite challenging utility power market dynamics, and move closer to achieving its goal of doubling revenue and operating margin over the next three to five years through a combination of organic and acquisitive growth.

We are encouraged by the steps management is taking to improve Global Power’s commercial market positions and expect productivity initiatives to enhance margins in future periods, but we acknowledge that higher-than-previouslyanticipated investments to create these benefits means that we may not see a material earnings lift until 2015. Following fourth-quarter results, we are lowering our 2014 and 2015 EPS estimates to $0.70 and $1.10 from $0.95 and $1.35, respectively; however, we are maintaining our 12-month price target of $23, which now assumes shares trade at 13.6 times and 10.3 times our 2014 and 2105 EBITDA estimates, respectively, as we anticipate further benefits of acquisition integrations over the coming quarters.

We lowered our 2014 and 2015 EPS estimates to $0.70 and $1.10 from $0.95 and $1.35, respectively. Our lower estimates are primarily attributable to higher-than-expected operating expenses—partially due to growth investments—along with lower revenue expectations in products and nuclear services. On a consolidated basis, our 2014 EPS estimate assumes 12% revenue growth (6% from incremental contributions from the IBI Power and Hetsco acquisitions completed in 2013), to $540 million, slightly above the midpoint of the company’s $525 million to $550 million revenue guidance, with products and energy services, Global Power’s two strongest and most-profitable businesses, driving the growth. Although our revenue forecast has come down in recent quarters, Global Power’s gross margin performance has been solid, helped by the early benefits from the company’s LEAN initiatives, which we expect will yield further incremental benefits in 2014 and beyond.

For 2015, while our new EPS estimate of $1.10 reflects a material reduction from our initial $1.35 estimate, we tried to take a conservative position with regard to margin expansion in Global Power’s businesses, as the company receives greater benefits from its commercial repositioning and simplified operations, and recovery of the company’s legacy utility power markets (in products and nuclear services), which we expect will remain under pressure throughout much of 2014. While we think there could be incremental upside to our expectations in Global Power’s energy-levered businesses (products and energy services), a resumption of acquisition activity in second half 2014 could provide greater upside to our 2015 forecast.

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