Accelerating revenues and triple-digit-earnings growth – this is what made Super Micro Computer, Inc. (SMCI) the 10-bagger it became the past 18 months. Ten-to-Fifteen-baggers are usually 18 month journeys, as typically before the final blow-off stage, the stock will need to base for another 6-9 months before the parabolic move begins.
During this time, growth will often slow and then, all of a sudden, BOOM!, a big reacceleration occurs to blast the stock to previously unforetold levels.
SMCI did exactly that as the company digested its previous growth phase. Note how before the December quarter acceleration, sales and earnings sagged for three quarters:
And then the explosive reacceleration in growth reignited the stock, which BLASTED OFF from its 5th-Stage basing pattern, thus completing its 10-bagger journey:
Source: StockCharts.com
Turning to THE 2nd BEST INFLECTION POINT of this earnings season, Powell Industries, Inc. (POWL) reported a similar re-acceleration in its business last week. WOW! What a quarter:
Its fiscal Q1 is always POWL’s weakest quarter of the year, yet the company posted a quadruple-barreled Inflection Point:
Most importantly, side-lined growth-oriented/inflection investors like Top Tier Inflections will now be happy to return to POWL. Just as SMCI’s growth reaccelerated after a brief slowdown, so too did Powell’s growth:
Similar to Super Micro, Powell also had a powerful move over the past 12 months. This Q1 Beat should usher in a new up-leg for the stock, as like SMCI, there is additional fundamental upside forthcoming. More on that in a minute, but first let’s take look at its weekly formation, a powerful 6-month Stage-4 basing pattern:
One final note on POWL’s share structure: It is tight. Super, super tight.
The share structure is another important component to the story which should help catalyze a significant mark-up & usher in a strong new up-leg. While SMCI has 60M shares outstanding and 15M shares are tightly-held by its CEO/Blackrock/Vanguard, in POWL’s case there is a paltry 9.1M shares in the float and 12M TOTAL outstanding:
Powell Industries is smack in the middle of one of the strongest secular investment themes in the world today – the need for more Power & Electricity:
Powell Industries, Inc., headquartered in Houston, designs, manufactures and services custom-engineered equipment and systems for the distribution, control and monitoring of electrical energy.
Powell’s markets include large industrial customers such as utilities, oil & gas producers, refineries, petrochemical plants, pulp & paper producers, mining operations, and commuter railways.
Importantly, POWL has become THE strategic supplier of choice for highly complex systems needed to successfully distribute and control the flow of electrical energy for many important growth verticals. Some of these include:
Over the last three years, POWL’s Data Center Business has gone from 6% of the mix to 15% of the mix. As the AI infrastructure build accelerates further and AI Inferencing initiatives begin to proliferate, we see BIG LONG-TERM UPSIDE for this part of the business. It should continue to become a more important part of the overall revenue mix, perhaps 25%-30% of revenues over the next 2-3 years.
Management was super upbeat on its recent conference call:
As for why the stock will work, a few reasons come immediately to mind:
First, like SMCI, the case can easily be made that POWL – even with its ~55% move since early last week – is now a cheaper stock today than it was before its last earnings were released. This is a rare and special combination wherein Triple-Digit+ EPS-Growth is ushered in by a notable beat and Forward Annualized Numbers suddenly go up 100% as well.
Fiscal Q1 – POWL is on an unconventional fiscal year (Q1 is Calendar Q4) – is always the company’s SLOWEST quarter of the year due to both the Holidays and the beginning of the cold weather.
Typically, its fiscal Q2-Q4s grow sequentially quarter-to-quarter. This implies very high odds that not only is $8 our baseline EPS for this year, but more so, Powell has the potential to print $10+ in EPS this year.
In this regard, the past three years have seen POWL boost its sales +15% sequentially from Fiscal Q1 to Fiscal Q2, another ~10% from Fiscal Q2 to Fiscal Q3, and then ~7-8% from Fiscal Q3 to Fiscal Q4.
Considering how orders re-inflected – a former concern of mine (and other investors) after orders dropped sequentially in a marked way 3 months ago – POWL now boasts a renewed backlog of $1.3B. Looking ahead, we can model a sequential stair-step to $225M and $2.4 in EPS for Fiscal Q2, $245M and $2.75 in EPS for Fiscal Q3, and $265M and $3.15 in EPS for Fiscal Q4.
Quick Math: If our numbers are right, our model translates into $10+ in EPS this fiscal year, a doubling over its prior year earnings.
The analysts who follow POWL are slow-moving and very conservative – Sidoti in particular. These guys are still asleep at the wheel. POWL’s quarters have a much stronger slope, sequentially, after Q1, culminating in its strongest quarter of the year in its fiscal Q4, or calendar Q3:
Again, these numbers are silly. But, thank goodness for silliness, as it strongly increases the odds we will have another 1-2 beats ahead of us before consensus catches up. This dispersion is what creates substantial upside for the stock.
In the case of SMCI, its large guide up eventually led smart Buy-Siders to revise their models and PT’s dramatically higher, well before the Sell-Side did. And the same thing is playing out for POWL in real-time today. Note how the stock traded nearly 400k on Monday. At this pace, in 4-5 weeks its entire float will have been turned over.
$145-$150 seems likely to be a zone where multi-week profit-taking would then ensue. We plan to trade around our position into any such move. With this in mind, we will tactically add to our position over the next few days on any dips down to the low-to-mid $120s.
As for its balance sheet, POWL has ~$30 in cash and no debt. Even if we don’t net out the cash, with POWL poised to grow its earnings 100% this year, I believe a 15x P/E Multiple is warranted. This gets us to $150, the high end of our short-term profit taking zone.
Looking further out, while orders will not be as powerful over the next few quarters as the LNG market has been frozen out, we now believe smart Institutional Investors are beginning to discern the potential for Powell to re-rate much higher over the long-term. Like us, they must be piecing together the immense scalability at play here.
Not only has Powell consistently increased its capacity the past few quarters, positioning it to exit the year at a $1B annualized run-rate, the company is also demonstrating incredible profitability scale. Again, some quick math:
Exiting at a $265M run rate in its fiscal Q4, we think POWL should be posting $3+ in EPS three quarters from now. At a $300M quarterly run-rate, POWL could be earning $16 annualized. In a scenario where Trump wins the upcoming election, LNG is projected to surge in 2025. Tack that on to the booming Data Center Business, which is also experiencing an AI Inference inflection, and it is pretty easy to see how the stock heads to $200-$250 in 2025. Note, this is under a Trump win scenario.
Clearly, LNG orders will freeze out in the near-term. Odds favor LNG orders going to a zero run-rate exiting Calendar Q1, meaning we could have 2-3 light order quarters ahead of us.
Another important risk to the story is Supply Chains, which remain front and center of the Inflation Debate with Prices Paid soaring earlier today. What if the Houthis get more aggressive and prices for shipping begin to accelerate further?
But, with odds apparently increasing for a Trump win in November, I think a lot of market guys want to buy into POWL well ahead of the final election verdict. Therefore, these risks are for the next few months to play out. Over next few weeks, to us at least, the risk lies in a quicker-than-expected overshoot to $140, if not, $150.
We were buyers of POWL stock and in-the-money calls on Monday. We will add to our position the next few days on dips to the low-to-mid $120s.
We see $140-$150 in the short-to-intermediate term.
Make no mistake. POWL’s report last week was THE 2nd BEST TOP TIER INFLECTION POINT of this earnings season. Investors will move into the name aggressively once they do the math.
We will take grades of risk off assuming the stock starts moving to our expected price extension zone in the coming days/weeks.
As for a STOP, we are utilizing a close below the 20-day EMA as the stop on our Trading Position. We plan to use the 50-day SMA as our stop on our Long-Term Position.
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Disclosure: We are long POWL and are also long in the money calls on the stock and plan to actively trade these options as the stock moves up to our anticipated shorter-term, intermediate-term and longer-term extension zones. We may change our positioning at a moment’s notice, without notifying you of any such moves.
Disclaimer: All of the information in this piece has been prepped by Inflections Consulting. Readers should know that it would be incorrect to assume that past and future names of interest will be profitable or will not turn into a loss. Inflections Consulting does not and will not assume any liability for any loss that could occur if you invested in such stocks written about.
All the content in these reports have been prepared by Inflections Consulting. We believe our sources to be reliable, but there is no guarantee here. The information in this piece does not constitute either an offer nor a solicitation to buy or sell any of the securities name-dropped in this piece.
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In no shape or manner should the views expressed in this piece be considered investment advice. We reserve the right to change our positioning in our POWL stock and options positions at a moment’s notice without updating you on any such change in opinion and positioning. That may be tomorrow, even before our price target is hit. Things change, our opinions can change quickly too.
Investors need to consider their investment risk tolerance before investing in the stock market and also before investing in any of the stocks mentioned in this report.
