Primoris: Looking Beyond The 2026 Earnings Trough

Primoris Services is rated Buy despite near-term pressure from six troubled renewable projects, which are expected to roll off by the end of 2026. Gross margins are projected to normalize to 10%-12% in 2027, supporting an earnings recovery and potential valuation rerating. Record backlog of $13.9B, strong natural-gas generation bookings, and Utilities MSA growth provide multi-year revenue visibility and reduce dependence on solar.

Analysis

The investable question is not backlog size but the earnings-conversion quality of the remaining fixed-price renewable work. PRIM’s multiple should remain constrained until investors can see that estimate-at-completion charges have stopped and cash conversion tracks reported EBITDA; a single additional loss reserve would reset confidence in the 2027 margin bridge. The critical near-term datapoints are quarterly project-cost revisions, operating cash flow versus adjusted EBITDA, and whether contract assets/unbilled receivables decline as projects close.

If execution stabilizes, PRIM has asymmetric operating leverage: a 200-300bp gross-margin recovery on a largely fixed overhead base could drive EPS materially faster than revenue, supporting a rerating from a troubled-EPC discount toward utility-services peers such as MTZ and MYRG. Natural-gas generation exposure also diversifies the revenue base, but it introduces permitting, interconnection and customer-financing sensitivity; bookings alone should not be valued at par with regulated utility maintenance revenue. Utilities MSA work is the higher-quality component because recurring scopes generally carry lower design/procurement risk and should improve earnings volatility over 6-18 months.

Consensus may be underestimating the duration of the de-risking process: the market typically waits for two to three clean quarters after legacy-project resolution before awarding normalized margins. Conversely, skepticism could become excessive if PRIM demonstrates positive free-cash-flow conversion while retiring loss-project exposure, since this would validate both reserve adequacy and working-capital release. A sharp decline in power-demand expectations, a slowdown in data-center-driven generation construction, or renewed project charges would falsify the recovery thesis.

Key Decisions for Investors

• Accumulate PRIM only after the next earnings report confirms no incremental legacy-project charge and operating cash flow at least matches adjusted EBITDA; target a 6-12 month recovery trade, with risk defined by exiting on a renewed project-loss reserve or reduced full-year margin guidance.
• Use a staged position rather than a full-size pre-resolution long: initiate one-third on verified execution improvement, add after a second clean quarter, and reserve final sizing for evidence that contract assets are converting to cash. The upside is multiple expansion on normalized earnings; the principal risk is a multi-quarter delay that leaves capital trapped in a low-confidence contractor valuation.
• Pair a PRIM long against MTZ or MYRG only if PRIM’s valuation discount remains wide after clean execution evidence; this isolates the idiosyncratic margin-recovery thesis from broad utility-capex and rates risk. Close the pair if PRIM’s booking mix shifts toward additional fixed-price solar EPC work rather than recurring utility or generation scopes.
• Set an alert for quarterly backlog-to-revenue conversion, cash flow, and contract-asset balances rather than reacting to headline bookings. A backlog increase accompanied by deteriorating cash conversion is negative for the thesis because it can signal lower-quality project mix or working-capital strain.