August 18, 2009, 5:00 am

Hill International – Pushing Papers and Pulling Profits

by: The Financial Blogger    Category: Investment, Market and Risk,Trading
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Zachary ScheidtGuest Post from Zachary Scheidt – Zach manages which focuses on uncovering investment opportunities in growth stocks – trading from both the long and the short side. Zach also is the Principal and Chief Investment Strategist at Sound Counsel Investment Advisors – a boutique investment company which seeks to provide independent investment advice to individuals while minimizing conflicts of interest or biases which are typically represented at larger investment firms.

It doesn’t seem that long ago we were anxiously awaiting information out of congress regarding stimulus measures geared toward revamping our aging infrastructure. The president promised “shovel ready” projects with “boots on the ground” immediately and plenty of other cliches. As it turned out, the red tape was thicker than many believed and the actual implementation of this program became somewhat bogged down by bureaucracy.

While many construction and project management companies suffered through a disappointing implementation, one unique business in the industry was quietly putting away profits. You see, Hill International (HIL) is actually made up of two separate divisions – each with a different area of expertise. In my February issue for Taipan’s New Growth Investor, I labeled these two divisions the “clipboard team” and the “dozer team.”

The clipboard team is actually involved with litigation, construction claims, and other paper pushing activities geared toward dealing with the invariable roadblocks that come up in the process of business. For the second quarter, Hill saw this division grow revenues by 20.7% as there was no shortage of red tape to work their way through.

Once the paperwork and court arguing is over and done with, Hill International can then fire up the dozer team and get started on its construction projects. While a decent portion of the company’s business is in the US – the global footprint has grown in recent years with the company now operating services in more than 30 countries. During the second quarter, this division also saw impressive growth with revenue up 13.9% over last year.

Management had positive comments about the environment stating that markets are beginning to recover and they see strength in the second half and heading into next year. Investors took the words to hear and bid the stock up 25%on Wednesday after the announcement.

Analysts are expecting Hill to earn $0.52 per share in 2010, but I believe these estimates are overly conservative. A number of stimulus measures across multiple government and geographical lines appear to be driving demand for project management. And with the rush to get funds actually implemented and generating jobs, there are bound to be more mistakes than normal which builds business for the clipboard team.

At the end of the second quarter, management noted that there was a backlog of more than $611 million in projects. That’s enough to keep the company busy for 18 months even if the sales team doesnt’ sell a single new project. Obviously the company is actively pursuing new business which is why the backlog is growing, but its helpful to note that the company has a built a stable of projects which will smooth operations should we have another economic downturn.

The stock is currently holding its gains from Wednesday very well and yet is still trading at only 12 times next year’s earnings. With sentiment improving and Hill proving that it can execute even in this difficult market, I expect the multiple to increase at the same time the earnings expectations are ratcheted higher. It wouldn’t surprise me to see the stock above $10 by the end of the year. So after a couple of quarters where the stock was unfairly punished, it appears investors in HIL are now primed to be rewarded.

Hill International (HIL)

For a Free Analysis of HIL, use TREND ANALYSIS

FD: Author does not have a position in HIL

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