Argan’s (AGX) Power Boom Comes With A Margin Catch

Argan (NYSE:AGX) reported its best second quarter in history on September 2, with revenue jumping 61.5% to $384.0 million and net income hitting a record $53.3 million for the quarter ended July 31. The company's Power segment, focused on building gas-fired plants, drove much of the growth, with revenue climbing 53% year-over-year to $301 million, representing 78% of total sales.

Gross margins expanded to 22.4%, benefiting from improved project mix and execution. Argan's backlog includes four gas-fired power plants in the US totaling over 4.1 gigawatts, with management expecting to add more projects over the next 7 to 15 months. The company is funded by a debt-free balance sheet with $1.03 billion in cash and investments, and returned $51.7 million to shareholders in the first six months of the year through a quarterly dividend and buyback program.

However, consolidated gross margins have been declining for three straight quarters, and the Industrial segment's gross margin fell to 7.3% in the latest quarter. Backlog also shrank to $2.5 billion as of July 31, reflecting project completions and the timing of new contract awards. Hedge fund ownership of Argan decreased slightly to 39 funds, while short interest sits at 7.84% of the float.

Despite these challenges, Argan's growth story is real, with record revenue, earnings, and a gigawatt-scale pipeline, but investors should be cautious as the market works out the impact of its backlog swings.