Integrated Electrical Systems (IES) is a holding company operating four businesses that offer industrial products and infrastructure ser...

Weekly Superstock Scan 28 Dec 2015 - 31 Dec 2015 - IESC


Integrated Electrical Systems (IES) is a holding company operating four businesses that offer industrial products and infrastructure services. The four business segments are communications, residential, commercial & industrial and infrastructure solutions.

IESC Business Segment (Source: Corporate Presentation Aug 2015)


Earnings Breakout with Large Volume
Price broke out from a 16 months consolidation period with above average volume on report of strong earnings. In the 3 weeks following the earning release, the stock is trading at 3-5 times its usual weekly trading volume.


Successful turnaround that started since 2011
IESC started its transformation in October 2011 when it brought James Lindstom in as CEO. From being a pure electrical contractor, IESC expanded its business to become an electrical-infrastructure company. The strategy paid off as losses shrunk and IESC became a profitable company again in the year ended September 2014. In addition, the additional income streams from the new businesses are more recurring in nature and thus less affected by seasonality and the construction cycle.

In the most recent quarter, fourth quarter of fiscal 2015, we see a whopping 300% increase in earnings per share from a year ago with a corresponding 17.5% increase in revenue.

Sustainable Growth Through Acquisition and Bidding Discipline
IESC’s operating execution and acquisition strategy leave the company in a good position to sustain the high level of earnings growth. 

During the transformation, IESC learnt its lesson from bidding on large and unpredictable long-term projects. Due to operation difficulties, these projects often lead to project delays and increase in cost. These lessons during the start of the transformation have helped to develop IESC’s bidding discipline. The targeted shift towards more predictable results and improved project execution is one key factor that contributed to the sequential increase in revenue and earnings during the transformation.

Another catalyst of sustained earnings growth is IESC’s acquisition strategy. In 2016, IESC completed three bolt-on acquisitions that are profitable and forecasted to add more than $30 million in revenue in fiscal year 2016.

Large Net Operating Loss Carryforward
IESC has an estimated $439 million of available NOLs for U.S. federal income tax purpose. The NOLs will begin to expire in 2022 with $151 million, the single largest expiration in a year, due for expiration in 2026. Based on the net income of $16.9 million in fiscal 2015, IESC will not be able to finish using the NOLs before they expire. With a strong balance sheet, I believe IESC will take advantage of the NOLs to acquire profitable companies.

Attractive Valuation
At the time of post, IESC’s stock price is $10.69. Using the annualised EPS based on the last quarter, the stock is trading at just 7.4x earnings.

Risk Factors/ Things I do not like 

  • Executive turnover – James Lindstom, the CEO who successfully transformed IESC, left the company in January 2015. His replacement, Robert Lewey, has been with the company since 2001. Even though the transformation is complete, we will have to wait to see if Lewey is able to guide to company to sustain the high growth enjoyed in the past few years.
  • Low operating leverage – IESC is in a low margin industry with high variable cost. For a sharp increase in EPS, IESC needs to increase revenue significantly
  • Decreasing Backlog – Backlog fell from $286 million as of September 3, 2014 to $270 million as of September 2015
  • High Float – The float is 7.48 million shares. IESC is a fairly illiquid stock, thus the float is still 467 times the average trading volume. 

Potential trade setup

Since Q4 2015 earnings release, the stock has already surged 40% in the past 3 weeks. It is too risky to enter a position in the stock now as it is over-extended. I will be waiting for the stock to retrace to the top of the consolidation box at the $9 region. If that happens, the 10wMA should also be around the $9 region and the two form of resistances will offer a low risk entry. The stop loss can be set around ten to twenty cents below the top of the consolidation box or the 10wMA.

Alternatively, the stock may not retrace due to strong buying pressure. In that scenario, I will wait for the stock to consolidate and close tight for 3 consecutive weeks with low volume before entering a position.

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