Argan Inc. (AGX), through its subsidiary Gemma Partners, is an Engineering, Procurement and Construction (EPC) company for the power and renewable energy industry.  The company has a history of delivering a diverse subset of power generation infrastructure projects.  AGX has managed the EPC of more than 80 facilities, equating to over 14,000 megawatts of power-generating capacity from combined (and simple) cycle natural gas fired power plants, biomass projects, solar facilities, wind farms, biofuel plants and environmental facilities.

AGX reported a $1.2B backlog as of 10/31/15, vs. $660M on 7/31/15.  The company carries a market cap of $435M with a Total Enterprise Value of $263M ($172M in net cash) as of 1/20/16.  For the trailing 12 month period ending 10/31/15, Argan generated a total of $399M in Revenue and approximately $62M in EBITDA, placing the stock at a 4.2x EV/EBITDA.  The company’s balance sheet and current valuation, coupled with what we believe to be a secular tailwind of incremental growth – driven by a replacement cycle of old coal generated power facilities in favor of environmentally friendlier gas fired power plants and renewable based alternatives – makes Argan an attractive, long term investment.IMG_1


Industry Trends Are Compelling

Coal fired electricity, as a proportion of total U.S. electricity production has declined from 51% in 2000 to 39% as recently as 2014.  To boot, more than 60% of coal fired power plants are over 40 years old, with many nearing the end of their useful lives.  Gas fired power production, in turn, has seen material growth as a percentage of total U.S. electricity production from 16% in 2000 to 27% in 2014.   Although total power generation in the U.S. has grown by only 3% over the last 10 years, natural gas fired power sources has increased by 58% while coal fired plants have experienced a total decline of 20%.


We believe industry trends will continue to favor both natural gas and renewables.  This is being driven predominantly by new regulatory standards put in place by the EPA to reduce carbon emissions.  Natural gas and renewables offer an efficient, greenhouse friendly and less costly means to replace coal electric power generation facilities and satisfy future consumer demand for more electricity.

In addition, new emission standards have become a major obstacle for any plans to build new coal fired power plants. The coal industry is similarly concerned that pending regulations limiting carbon emissions may jeopardize the continuing operation of existing coal fired power plants. The future of “clean burning coal” is equally uncertain.  Many of these recently constructed clean burning coal based plants, flaunted as the gold standard for generating clean electricity from low quality coal, have experienced soaring construction costs.

Powerful Cost Incentives

Economically, new natural gas fired plants are relatively cheaper to procure and construct than coal, nuclear, or renewable plants and produce dramatically less carbon dioxide emissions than coal.  The abundant availability of cheap, less carbon intensive natural gas should continue to be a driving factor in the economic assessment and sustainability of future power plants.

Argan tends to bid projects on a fixed cost basis, with an average project size of $270M over its last seven jobs – with three years average duration on these projects.  Argan Management’s extensive experience in properly estimating costs and delivering projects on a timely basis has allowed the company to successfully and sustainably operate its business at economically robust margins compared to competitors.  We believe industry trends will continue to look favorable for Argan in the years to come, allowing the company to steadily build its backlog and generate strong free cash flow streams for the foreseeable future.


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