Executive Summary / Key Takeaways

• Argan (NYSE: AGX) is strategically positioned to capitalize on the surging demand for new energy infrastructure, driven by electrification trends like AI data centers, EVs, and manufacturing reshoring, coupled with the aging power grid.
• The company leverages its specialized engineering, procurement, and construction (EPC) expertise for both complex natural gas and renewable energy facilities, a key competitive differentiator in a market with high barriers to entry.
• Recent financial performance, highlighted by a 23% revenue increase and a significant jump in gross margin to 19.0% in Q1 FY2026, demonstrates strong operational execution and a favorable project mix.
• A record project backlog of $1.9 billion as of April 30, 2025, with expectations to exceed $2 billion, provides strong revenue visibility and signals continued growth potential, particularly in the natural gas segment.
• Argan maintains a robust balance sheet with substantial cash and investments, zero debt, and a commitment to returning capital to shareholders through dividends and share repurchases, underpinning financial flexibility and long-term value creation.

Argan: Building the Backbone of the Electric Economy

Argan, Inc., established in 1961, has evolved into a specialized engineering and construction firm focused on critical infrastructure. Operating through its Power Industry Services, Industrial Construction Services, and Telecommunications Infrastructure Services segments, Argan has carved out a significant role, particularly in the power generation market across the U.S., Ireland, and the U.K. The company's history is marked by a consistent focus on value creation, evidenced by its track record of increasing tangible book value and cumulative dividends per share since 2008, alongside a disciplined approach to capital allocation. This foundational strength and strategic evolution have positioned Argan to respond effectively to the transformative shifts currently reshaping the energy landscape.

The core of Argan's strategic response lies in its specialized EPC capabilities, which can be viewed as its primary technological differentiation. Unlike generalist construction firms, Argan possesses the deep engineering know-how, complex project management expertise, and skilled workforce required to design, procure, and construct large-scale, sophisticated power facilities. This includes ultra-efficient combined cycle natural gas plants, utility-scale solar fields, biofuel facilities, and battery storage systems. The tangible benefits of this expertise are reflected in the performance characteristics of the projects they deliver – for instance, the Sandow Lakes and Trumbull combined cycle plants are highlighted for their ultra-efficiency and clean operation within their respective grids. The Tarbert biofuel plant demonstrates capability in sustainable energy sources with potential for future hydrogen conversion. While specific, universal quantifiable metrics like "X% higher energy yield" aren't provided across all technologies, the company's ability to deliver projects designed for high efficiency, reliability, and increasingly, lower emissions, underscores the value of its specialized engineering and construction processes. Management's emphasis on "excellent on-time execution" and "on-time and on-budget project delivery" further points to the operational efficiency derived from this specialized capability, which is critical in complex, multi-year construction projects. The company's investment in its workforce is a direct commitment to maintaining and enhancing this core operational "technology."

This specialized expertise is a critical competitive advantage in a market characterized by high barriers to entry, including stringent regulatory requirements, significant capital needs, and the necessity for a highly skilled workforce. While larger, more diversified EPC firms like Quanta Services (PWR), Fluor Corporation (FLR), Jacobs Solutions (J), and MasTec (MTZ) operate across broader infrastructure sectors, Argan differentiates itself by focusing on the technical complexity and scale of power generation projects. Compared to these peers, Argan's financial profile often exhibits higher gross margins (16.1% TTM consolidated, 19.0% in Q1 FY2026) and a remarkably clean balance sheet with zero debt, contrasting with the moderate to higher debt levels seen at PWR, FLR, J, and MTZ. This financial strength provides Argan with greater flexibility and resilience. However, Argan's smaller scale and more concentrated geographic focus (primarily US, Ireland, UK) represent potential disadvantages compared to the global reach and vast resources of some larger competitors. Despite these differences, Argan's ability to secure large, complex projects, as evidenced by its growing backlog, demonstrates its competitive effectiveness within its chosen niches.

Financial Momentum Reflecting Strategic Execution

Argan's recent financial performance provides a clear picture of its successful navigation of the current market opportunities. For the first quarter of fiscal year 2026, the company reported consolidated revenues of $193.7 million, a significant 23% increase compared to $157.7 million in the same period of the prior year. This growth was predominantly fueled by the Power Industry Services segment, which saw its revenues jump by 45.4% to $160.4 million. This segment's performance was driven by increased activity on key projects including the 405 MW Midwest Solar Project, the Louisiana LNG Facility, and the Trumbull Energy Center, partially offset by projects nearing completion.

Profitability saw a substantial enhancement, with the consolidated gross profit margin expanding to 19.0% in Q1 FY2026, up sharply from 11.4% in Q1 FY2025. This improvement reflects a favorable shift in the mix of projects towards potentially higher-margin opportunities and contract types, as well as strong execution across the business. Notably, the prior year's margin was negatively impacted by a $2.6 million loss on the Kilroot project, highlighting the sensitivity of margins to project-specific challenges. Segment-wise, Power Industry Services reported a robust 20.6% gross margin in Q1 FY2026, while Industrial Construction Services and Telecommunications Infrastructure Services reported 10.8% and 18.0%, respectively. Selling, general, and administrative expenses, while increasing in absolute terms, decreased as a percentage of revenues, demonstrating operating leverage at 6.5% in Q1 FY2026 compared to 7.2% in the prior year period.

Net income for Q1 FY2026 reached $22.6 million, or $1.60 per diluted share, a significant increase from $7.9 million, or $0.58 per diluted share, in Q1 FY2025. EBITDA also saw a strong increase to $30.3 million, representing 15.6% of revenues.

The company's liquidity remains a significant strength. Cash and cash equivalents increased by $44.0 million during Q1 FY2026, reaching $189.3 million.

Net cash provided by operating activities was $35.3 million, primarily driven by a substantial decrease in accounts receivable ($69.3 million) due to strong collections. While contract liabilities and accounts payable/accrued expenses decreased, representing uses of cash, the overall operating cash flow was robust. Investing activities provided $24.9 million, largely from the net maturity of investments. Financing activities used $18.0 million, primarily for common stock repurchases ($6.8 million) and cash dividends ($5.1 million). Net liquidity (working capital) increased to $315.1 million, further bolstering the company's financial flexibility. Management highlights that this strong liquidity position, coupled with no debt and low capital expenditure requirements, is crucial for maintaining bonding capacity and supporting parent company guarantees for large projects.

A Record Backlog and Clear Growth Runway

The most compelling indicator of Argan's future prospects is its record project backlog, which reached $1.9 billion as of April 30, 2025, a substantial increase from $1.4 billion at the end of the prior fiscal year (January 31, 2025) and $824 million a year earlier (April 30, 2024). This backlog provides significant revenue visibility over the next several years.

Management anticipates recognizing approximately 32% of the $1.9 billion backlog as revenue during the current fiscal year ending January 31, 2026, with the majority of the remainder expected in fiscal years 2027 through 2029. The composition of the backlog reflects the evolving market dynamics, with approximately 67% attributed to natural gas projects and 28% to renewable projects as of April 30, 2025. This marks a shift from the prior quarter (January 31, 2025), which had a higher proportion of renewables (54% gas, 42% renewable), indicating a renewed emphasis on natural gas facilities to meet reliability needs.

Management is highly optimistic about the project pipeline, driven by the unprecedented increase in electricity demand from AI data centers, electric vehicles, and manufacturing onshoring, coinciding with the retirement of aging power plants. They believe this environment will present attractive opportunities for the next decade and beyond, with expectations to add "several power industrial jobs over the course of the next six months, which should put us significantly over $2 billion in backlog later this year." Specific large projects contributing to or expected to contribute to future revenue include:

• Sandow Lakes Power Station (Texas): 1.2 GW combined-cycle natural gas plant. Construction expected to begin summer FY2026, completion in 2028.
• Tarbert Next Generation Power Station (Ireland): ~300 MW biofuel plant. Full construction commencing FY2026, planned completion end of calendar 2027.
• ~700 MW Combined-Cycle Project (U.S.): Natural gas plant. Project activity commenced Q4 FY2025, completion scheduled FY2028.
• Louisiana LNG Facility: Installation of five 90 MW gas turbines. Completion scheduled first half FY2026.
• 405 MW Midwest Solar Project (Illinois): Utility-scale solar field. Completion scheduled first half FY2027.
• Midwest Solar and Battery Projects (Illinois): Completion of the final project (of three) expected within the next 12 months.
• Trumbull Energy Center (Ohio): 950 MW combined-cycle natural gas plant. Completion scheduled first quarter FY2027.

The Industrial Construction Services segment also saw its backlog increase to $91.4 million as of April 30, 2025, and management expects its revenues to increase meaningfully over the next several quarters, driven by strong interest from the onshoring of U.S. manufacturing. Overall, management expects consolidated revenues to increase from the Q1 FY2026 level over the course of the year, signaling confidence in converting the growing backlog into top-line growth.

Risks and Challenges

Despite the favorable market backdrop and strong performance, Argan faces inherent risks and challenges common in the EPC industry and specific to its operations. Project execution risk is paramount, as demonstrated by the historical challenges and losses incurred on the Kilroot project in Northern Ireland. While the operational phase of Kilroot has concluded, the company is involved in legal proceedings to recover significant claims, and the outcome remains uncertain. Such complex, fixed-price contracts carry the risk of cost overruns or delays impacting profitability.

Broader industry headwinds include supply chain delays, which have contributed to extending typical project timelines for combined cycle plants from 2.5-3 years to 3-4 years. Limitations in the manufacturing capacity of key equipment like gas turbines also require early commitments from developers and can impact project schedules. Interconnection queue backlogs, affecting both gas and renewable projects, remain a challenge, although developers are adapting by pursuing "behind the meter" solutions. Changes in U.S. trade policy, such as tariffs on materials like steel and aluminum, introduce cost and supply chain uncertainties that could affect project economics and timelines.

Furthermore, the company's reliance on a relatively small number of significant customers (two power customers accounted for 30% and 25% of Q1 FY2026 revenues) and customer concentrations in accounts receivable and contract assets expose it to potential risks if a major customer experiences financial difficulties or project cancellations. While the company maintains significant liquid capital to mitigate some risks, the ability to secure bonding and parent company guarantees remains crucial for winning large contracts.

Conclusion

Argan is riding a powerful wave of demand for new energy infrastructure, driven by secular trends that necessitate significant investment in both reliable natural gas and renewable power generation. The company's specialized EPC expertise, honed over decades, positions it as a key player capable of executing the complex projects required to meet this demand. The record backlog, coupled with strong recent financial performance characterized by revenue growth and expanding margins, provides a compelling picture of the company's current momentum and future potential.

While project execution risks, supply chain constraints, and interconnection challenges remain factors to monitor, Argan's robust balance sheet, disciplined capital allocation strategy, and management's clear focus on leveraging its core competencies suggest it is well-equipped to capitalize on the opportunities ahead. The expected increase in backlog, particularly driven by large natural gas projects, underscores the company's strategic alignment with the immediate needs of the grid for reliable, 24/7 power. For investors seeking exposure to the build-out of critical energy infrastructure, Argan presents a compelling narrative of specialized capability, financial strength, and a clear runway for growth.