Backlog And Regulatory Pipeline Work Will Support Stronger Future Performance

Catalysts

About Centuri Holdings

Centuri Holdings is a North American utility services company that builds, maintains and upgrades gas and electric infrastructure for utility and industrial customers.

What are the underlying business or industry changes driving this perspective?

• Record backlog of about $5.9b and an opportunity pipeline of roughly $13b, including more than 600 strategic bids, gives the company multi year visibility on awarded and potential work, which can support sustained revenue and better fixed cost absorption over time.
• Large programmatic work tied to PHMSA Gas Mega Rule pipeline regulations, such as the 9 figure steel pipeline replacement project in the Midwest, points to regulatory driven gas infrastructure spending that can support steady volumes and help stabilize segment earnings.
• Expanding exposure to data center and industrial power projects, including work scopes above $50m for data center campuses and strong demand for substation and inside electric work, positions the business to participate in long term power and grid investment, with potential upside to project margins and overall profitability.
• Momentum in MSAs, with about $170m of renewals and more than $65m of incremental contracts across U.S. regions, increases recurring revenue from long standing utility partners and can support more predictable cash flows and smoother net margin performance.
• Initiatives such as fleet optimization, a targeted 50 50 funding mix for equipment, and a focus on contract management and operational execution aim to improve fleet efficiency and project productivity, which can feed through to gross margins, EBITDA and free cash flow.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Centuri Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Centuri Holdings's revenue will grow by 13.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.0% today to 1.8% in 3 years time.
• The bullish analysts expect earnings to reach $85.1 million (and earnings per share of $1.46) by about June 2029, up from $30.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 88.1x on those 2029 earnings, down from 104.4x today. This future PE is greater than the current PE for the US Construction industry at 47.6x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.67%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Storm restoration work is an important but volatile contributor to results, and the 2025 outlook already reflects lower storm activity. A sustained period of limited storm events could reduce high margin revenue contributions and weigh on adjusted EBITDA and earnings compared with periods that benefited from heavier storm work.
• Non Union Electric margins show pressure, with gross profit margin of 7.1% compared to 16.6% last year and base gross profit margin of 7.1% compared to 8.7%, partly due to a more than 20% headcount increase to ramp new MSAs. If similar ramp costs persist as the company adds contracts, this could limit net margin expansion and earnings growth even if revenue remains healthy.
• The business model relies heavily on large multi year MSAs and a roughly $13b opportunity pipeline, including over 600 strategic bids. Any slowdown in awards, loss of renewals or repricing pressure from utilities and industrial customers could reduce backlog visibility and eventually affect revenue and cash flow consistency.
• Centuri carries sizeable debt, with net debt to adjusted EBITDA of 3.8x on a trailing 12 month basis and a large Term Loan B of $800m. If free cash flow remains weak beyond the current expectation of a fourth quarter improvement, higher interest expense or limited deleveraging capacity could pressure net income and financial flexibility.
• Gas operations still face seasonality, including a first quarter loss of $15m mentioned as a key issue. If efforts to smooth workload across the year through new customers and contracts fall short, recurring first quarter softness could drag on full year margins, earnings and return on invested capital over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Centuri Holdings is $46.0, which represents up to two standard deviations above the consensus price target of $37.08. This valuation is based on what can be assumed as the expectations of Centuri Holdings's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $46.0, and the most bearish reporting a price target of just $29.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $4.6 billion, earnings will come to $85.1 million, and it would be trading on a PE ratio of 88.1x, assuming you use a discount rate of 9.7%.
• Given the current share price of $31.85, the analyst price target of $46.0 is 30.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.