Over the last three months, Granite Construction (NYSE:GVA) has been among the hottest stocks on the market. In fact, GVA stock has risen about 58% in that short period.
The stock closed for trade Jan. 26 at almost $32 per share. That’s a market cap of $1.5 billion for a company that booked $2.5 billion in revenue for the first nine months of 2019 and hasn’t even reported in 2020. Its new numbers are expected on Feb. 20.
So, what’s going on here? Well, it seems to be a story about hope, redemption… and “Infrastructure Week.”
The Scandal with GVA Stock
Granite Construction is primarily a road builder and materials company based in California. It bills itself as “America’s Infrastructure Company” and that’s one reason investors are buying it.
But there’s a problem.
Back in August, the company said its 2017 results could no longer be relied upon. It had previously said this about its 2018 and 2019 numbers.
The issue has come from its Heavy Civil unit — joint ventures where Granite was a “minority partner.” Basically, GVA had gone into big projects with deep-pocket partners and was accounting for revenue based on completion estimates from those partners. When CFO Jigisha Desai came into the company in 2019, though, she chose more conservative accounting.
In September, heads started to roll. CEO James Roberts retired and was replaced by Kyle Larkin. Additionally, the head of California operations moved up to COO and Executive Vice President. In turn, a head of Nevada operations was moved over to California. Even now, though, the most recent financial results listed for the company cover the third quarter of 2019.
Because of all that, GVA stock remained stuck in the doldrums until November. The most important thing that happened, however, was that Granite retained its dividend at 13 cents per share. This has seemed to give investors a belief that the worst is over for the company — that the errors were all accounting and not really a scandal at all.
The Hope for Granite Construction
You can date the jump in GVA stock precisely. It began on Nov. 4, the day after the election, with Granite below $19 per share. Since then, the climb in January has been nearly vertical, especially because the Georgia run-offs put the U.S. Senate into Democratic hands.
The expectation? Investors are banking on a flood of infrastructure construction, which would be a boon for Granite. In fact, some analysts are comparing President Joe Biden’s first year to Franklin Roosevelt’s, saying there’s bipartisan support for the kind of work Granite and others are doing. Most of the company’s business today is under state contracts and much of its new work is expected to be federal.
However, I see a problem with this hope: big projects are what got Granite into trouble. It bid on them with joint venture partners, took minority stakes and then accounting difficulties followed. And the company is still doing these kinds of deals, evidenced by a recent $750 million military contract announced on Jan. 19. GVA isn’t getting anywhere near $750 million — it has a partnership and is actually one of five winning bidders.
So, my take on GVA stock? Just because a company bills itself as “America’s Infrastructure Company” doesn’t mean it’s solely in charge of America’s infrastructure.
Granite remains, mainly, a road and sewer contractor working in the western United States. Plus, its stock has been rising despite a distinct lack of analyst enthusiasm. Essentially, I think investors are seeing the $1.9 trillion figure on the new President’s stimulus plan and getting ahead of themselves.
This is a company whose revenue has been growing incrementally, whose financial reports are currently unreliable and whose dividend may not be covered by earnings.
Maybe the stock can recover its 2018 peak, when it traded near $70. But I need proof before I jump in. Hope alone is not a plan.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.