Highly shorted Powell Industries (POWL) has done well in the past few years, making it one of the best-performing companies in Wall Street. It has risen in the last two consecutive months, reaching a record high of $247, up by 1,282% from its lowest point in 2023. As a result, its market cap has soared from $260 million to over $3 billion.
Company in a complex industry
Powell Industries, a company with a 13% short interest, is a leading player in a niche industry. It manufactures products that distribute, control, and monitor the flow of electrical energy.
Its products are also used to protect motors, transformers, and other electrical products. Most of its products are ordered by companies in industries like those in the oil and gas industries, including in terminals, pipelines, and refineries.
Powell Industries has also expanded its business to include solutions for mining, transport, utilities, and data centers.
To a large extent, the firm maintains most of its clients for a long time because of the challenges of switching to other companies.
Its stock has surged in the past few years because of ongoing investments in the United States’ oil and gas industries. Crude oil prices have remained elevated in the past few years, while the number of active rigs has jumped.
Most importantly, the US has become a big player in the natural gas industry, especially after Russia invaded Ukraine. In that period, its gas exports have almost doubled, with most of them going to European countries.
Data by Statista shows that the industry’s capital expenditures rose to over $142 billion in 2023 from $104.4 billion a year earlier. It has done well after bottoming at $60 billion in 2020.
Powell Industry’s business is highly cyclical and usually depends on capital expenditure in the oil and gas sectors.
Earnings and backlogs are growing
Powell’s stock price has done well because of its strong revenue and backlog growth. Revenue jumped by 50% to $288 million, new orders rose by $356 million, and the total backlog jumped to over $1.3 billion.
These results were notable because they were close to the $470 million it made in the whole of 2021. Its net income of $46 million was higher than the $13.7 million it made in 2022,
Analysts are optimistic that it will continue doing well in the near term as demand for its solutions rise. The average estimate is that its revenue will rise to $1.0 billion in the current financial year followed by $1.1 billion in the next one.
Key challenges remain
Powell Industries stock faces major challenges ahead. First, the stock has risen so fast that it is now priced to perfection. In most cases, such a rally is usually turned off by a simple event like a weak earnings report. Therefore, its next earnings report on December 3 will likely catalyse a reversal.
Second, there is a risk of the cyclical nature of the oil and gas industry. Some analysts believe that investments in the current cycle may have peaked.
Additionally, Powell’s valuation has become relatively stretched. It has a forward P/E ratio of 20 and a trailing multiple of 22.
Powell Industries stock analysis
POWL chart by TradingView
The weekly chart shows that the POWL share price has been in a strong bull run for a long time. Most recently, it crossed the important resistance point at $208, invalidating a forming triple-top pattern.
The stock has also remained above the 50-week Exponential Moving Average (EMA), while the Relative Strength Index (RSI) and the MACD indicators have pointed upwards.
Therefore, while the stock’s outlook is bullish based on trend-following principles, there is a risk of a severe pullback.
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