Description

BWMN is an undiscovered rollup story. They are following a successful prototype (NVEE) but we are not paying for the optionality at current prices. I believe BWMN can be a 3-5 bagger in 4-5 years and trade $40-70/shr. This doesn’t require heroic assumptions – just that it can approach the size and profitability metrics of its closest public peer, NVEE.

Background

Bowman (BWMN) is a recent IPO that went public in May 2021 at $14.00/shr. It has a market cap of 155mm. Approximately 25% of the company is owned by the founder/CEO and ~8% by other executives. Another one third is owned by other employees and the remaining third is the public float – there is significant insider skin in the game.

The Business / Growth Strategy

Bowman is a design/engineering firm founded by Gary Bowman in 1995. They do design work for various end markets. They do not take on any build or construction projects – BWMN is a people business and has little PP&E.

BWMN went public with the express purpose of more rapidly executing its rollup strategy. They are following the NVEE playbook which has been a homerun for shareholders over the last decade. BWMN has bought and integrated 16 assets in the last 10 years. They plan to accelerate this pace to several per year going forward.

The engineering market is very fragmented. There are 130,000 US firms with total expected revenue of $204bn in 2020. The top 500 generated $86bn last year with the top 10 accounting for $27bn. IBISWorld projects the industry will grow low single digits over the next five years.

The Bet

BWMN:  $14 * 11.1mm shares = 155mm cap – 12mm net cash = 143mm EV. 14mm 2021 consensus EBITDA = 10.2x EBITDA. NVEE trades at 13x EBITDA.

There are three parts to the bet: 1) multiple expansion, 2) margin expansion, 3) accretive M&A/multiple arbitrage.

 Multiple Expansion: BWMN came public at 10x 2021e EBITDA and NVEE trades at 13x EBITDA. Due to being net cash, there is a lot of room for acqusitions which can translate into value creation. If BWMN goes from 1.5x turns of net cash to 1.5-2.0x turns of net debt, equity accretion should be substantial. (Note that NVEE has ~2x debt/EBITDA.) I also think the multiple can expand as the company grows and liquidity picks up.

Margin Expansion: Post IPO and pubco costs, BWMN should generate a 10-11% EBITDA margin (on net revenue) in 2021. I believe this can expand to 15-20% over time as they gain scale and leverage their opex a bit better. As NVEE rolled up smaller engineering firms, this was their EBITDA margin trajectory from 2013 to 2020: 10.6%, 13.4%, 15.4%, 14.9%, 16.3%, 17.9%, 17.4%, 20.6%. (Over this time NVEE grew its revenues from 55mm to 511mm.)

*Net revenues for BWMN and NVEE are defined as gross revenues less pass-through costs.

Accretive M&A/Multiple Arbitrage: BWMN plans on doing acquisitions with roughly 25% equity and 75% debt. They want to 3-4x the business revenue in 5 years. (Mgmt. estimates this would allow them to break into the Top 50 ENR firms at that time - a lifetime goal for Gary.) This should be very accretive to equity given the equity/debt mix. They believe they can pay roughly 5-6x EBITDA (4-7x with most being in the 5-6x range) for acquisitions while trading at 10x. There are also cross-selling opportunities after small firms are rolled into the larger BWMN system. The multiple arbitrage alone should be valuable to us as shareholders. As mentioned above, they are hoping to do several acquisitions per year.

BWMN bought KTA Group in January 2021. BWMN paid ~$3.5mm = ~5x after working capital adjustments.

The company plans on issuing the 25% equity to the sellers to incentivize and retain those employees.

Reward: Note that the reward case is just a framework for thinking about the potential upside. But the simple point is that if they can execute, there should be a lot of upside.

Risk: 5.5x is a large discount to public peers and I think there would be appetite to be rolled into a company like NVEE at that valuation. Every turn is $1.30.

Risks

• Execution failure. BWMN could make poor acquisitions, pay too high a price, or not extract expected value from their transactions.

• This is a people business. There is a risk that employees defect or that economics accrue to employees rather than shareholders. I believe these risks are partially mitigated by the employees’ stakes in the business and the associated vesting requirements. BWMN (as well as other industry participants) has been dealing with this throughout its history and has managed through it. BWMN strategically spreads client revenue out across different teams to further mitigate this risk. The significant insider ownership is also a risk mitigant.

Catalysts

• Management will provide guidance for the first time on the 2Q call in August

• Management believes they can do several acquisitions per year. As they start making acquisitions, we will be better able to judge their success.

** The thesis expressed above contains forward-looking statements and is intended for informational purposes consistent with the nature of this forum; it is not a recommendation to buy, sell, hold or otherwise trade the securities of the referenced issuer.  The authors/their affiliates do not hold a position with the issuer such as employment, directorship or consultancy.  The authors/their affiliates currently own a position in the referenced issuer's securities; however, that position may change at any time and without notice.

Catalyst

• Management will provide guidance for the first time on the 2Q call in August

• Management believes they can do several acquisitions per year. As they start making acquisitions, we will be better able to judge their success.