How Is This Company Finally Turning Things Around?

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Market-watchers and investors have widely divergent opinions about the emerging "green economy." Many remain skeptical of eco-friendly start-ups' business models and prefer to invest in larger, more established firms that innovate incrementally. Others believe that smaller firms are far more likely to discover and harness the sorts of disruptive, paradigm-shifting technologies that create value for investors and open up new markets for exploitation. Those who fall into the latter camp are more likely to make risky bets on unproven firms. While most such bets fail, those that succeed tend to pay off handsomely.

Of course, there is a sizable middle ground between innovative conglomerates like GE and promising but risky start-ups like Tesla. TRC Companies (NYSE: TRR) clearly occupies this happy medium. The company engages in a rather boring mix of waste management services, electrical grid maintenance, energy-efficient infrastructure upgrades and other behind-the-scenes activities. Although the company was an early innovator in the now-hot "green economy," it has struggled to post robust profits and has seen more than its fair share of stock-price volatility. Amid signs that TRC Companies may finally be turning a corner and preparing for a new phase of growth and development, investors would do well to peel back the curtain on this often-overlooked firm.

TRC Companies and the Competition

Despite its diversified operational portfolio, TRC Companies is a rather small firm. Many of its larger competitors concentrate the bulk of their manpower on more profitable or lucrative operations and regard waste management or infrastructure maintenance as loss-leading niche businesses. Nevertheless, larger firms like URS Corporation (NYSE: URS) and AECOM Technology Corporation (NYSE: ACM) bring considerable heft to these areas of operation and force TRC to innovate constantly. 

With a market capitalization of about $225 million and an enterprise value of roughly $200 million, Windsor, Connecticut-based TRC is much smaller than URS or AECOM. For its part, URS has a market cap of $3.5 billion and an enterprise value of $5.4 billion. AECOM's $3.3 billion market cap and $4 billion enterprise value give it ample weight as well.

TRC's diminutive size does not render it incapable of turning a profit. In 2012, the company earned $17.3 million on total revenues of $313 million. This made for a decent profit margin of about 5.5 percent. URS was only able to eke out a narrow profit of $302.8 million on $11.4 billion in gross revenues, and AECOM lost about $63.5 million on revenues of $8.2 billion. Meanwhile, TRC has a debt load of $7.8 million and a cash reserve of $10 million. URS has debts of over $2 billion and cash reserves of just under $250 million, and AECOM's debt load is roughly double the size of its cash reserve.

Recent Price Action

TRC is near the high end of a wide and highly volatile trading range. Over the past two years, the company has traded between a high of $8.30 per share and a low of about $2.70 per share. Its deepest dive came during the second half of 2011, and its recent high was notched during the opening months of 2013. Although most market-watchers would argue that the company's technical action has generally been favorable since its sub-$3 run, TRC's recent price action suggests a slight downward trend.

Notable Developments

Despite its stock-price volatility and under-the-radar business model, TRC has notched some important victories during the past few months. The company recently received a potentially valuable patent for a byproduct-capture system that significantly reduces groundwater pollution at decommissioned coal-gas plants. It has also added some much-needed experience to its management ranks and secured a $75 million working-capital facility from RBS. TRC has made no secret of its intention to use this fund to facilitate its organic growth plans. While this is a positive for the company's long-term growth prospects, current and prospective shareholders who believe that the company should redouble its capital-return efforts are unlikely to be satisfied.

What About Its Competitors?

Although TRC must contend with some formidable competitors, its principal adversaries lack clear competitive or financial advantages in its core areas of operation. URS and AECOM lack the sort of consistent profitability that would cause TRC's management team to worry, and larger firms like GE and Waste Management lack the impetus to price TRC out of the field. As such, TRC finds itself in a sweet spot: Although it is far from being the dominant player in the process-management and industrial-efficiency spaces, it is wholly in control of its own destiny. After years of mediocre earnings and stock-price movements, it will be up to the company's revitalized management team to attract and retain enthusiastic investors.

Invest or Stay Away?

TRC Companies is neither a spec play nor a conservative value name. As such, it has the potential to make rank-and-file investors a bit nervous. Despite this awkwardness, many investors and market-watchers believe that it has tremendous potential. Many of its core services will become increasingly relevant in the face of rising energy prices and changing weather patterns. In addition, its new credit facility is roughly one-third the size of its total enterprise value and will provide considerable breathing room during its upcoming expansion.

In sum, TRC Companies looks poised to enter a new phase of growth that could rejigger its multiples and help its stock reach new highs. The firm has a long track record of success in the infrastructure business and finds itself on the right side of history. Investors who believe that TRC's niche is on the brink of a major expansionary period would do well to take a closer look.

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Mike Thiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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