When the Government Becomes Your Co-investor

Tyler Crowe (0:02)

The Government as an Investing Partner? Motley Fool Hidden Gems Investing starts now.

Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by long time full contributors, Matt Frankel and Lou Whiteman.

We are going to do our best to talk about investing with the government getting involved more in companies recently, without touching too many political rails here. We're trying to do this as much as an apolitical, we are investors, we are trying to invest, and the reality is the government is getting more involved in companies. We're also going to hit the mailbag. But first, we're going to start with some off calendar earnings. I guess you could say, Forgent Power Solutions, they're actually a frequent recommendation in several hidden gem services here at the Motley Fool. Shares are up about 10% after they reported their fiscal fourth quarter and full 2026 results. The company exceeded both Wall Street and its own expectations actually, and swung into profitability, and frankly put up numbers that aren't really commensurate with what most people would say is an electrical equipment manufacturer, making things like switch gears and circuit breakers and stuff like that. I mean, there were a lot of numbers that stood out to me, and we can get into those. But guys, what stood out to you the most?

Lou Whiteman (1:24)

Well, let's take it just the simple ones, the top and bottom line beat with a guidance boost, and that's what's been missing in a lot of earnings reports this season. You're right, we're kind of done this season, but the kind of theme for now was things are fine, but we don't know about the future. ForgenC is really, really confident about the future. The guidance part stands out because for all these picks and shovel companies, capacity, how much you grow from here is a real issue. Well, they can grow from here. They're forecasting 75% year-over-year growth in fiscal 27, which has started. That's just at the midpoint. Tyler, I also like to see that the EPS guidance was boosted because they did a secondary back in June. Some of it was just selling existing shares, their private equity owners, but some of it was new shares they were adding to the denominator. So, if they can earn more per share than expected at a time when they are growing the number of shares, that's a real good sign that the company is really, dare I say it, firing on all cylinders.

Matt Frankel (2:23)

Yeah, I mean, the beaten race was definitely the headline. But to me, that isn't the biggest story. To me, it is the $1.5 billion in bookings Forgent added in the second quarter. That is up 375% year over year. I feel like with some of these AI trades, those numbers just get so big. How do you put them in context? But it represents a book to bill ratio of 3.3, meaning that Forgent's bookings are 3.3 times its revenue that it's reporting. The company's backlog is now over $3 billion.

That's up 53% sequentially. The margin improvement was impressive. Most switchgear and transformer companies that are comparable to Forgent report adjusted EBITDA margins in the upper teens. Forgent reported a little over 24%.

And they're spending money to add capacity, and it seems like it's for good reason.

Tyler Crowe (3:12)

Yeah, one of the things that stuck out to me is we have a company that was relatively unprofitable. It's been growing at rather impressive rates. And based on their forecast for the upcoming fiscal year, which will be basically from now until mid-September next year, they're expecting like $1.25 to $1.4 or $1.40, excuse me, in earnings per share for fiscal 2027, which just doing a quick back of the math in my head, it's somewhere around like 25, 26 times forward earnings. A company growing this fast, that seems relatively reasonable, and it kind of gets almost to me is almost like a little bit of a hunt. That's relatively cheap if it might be some sort of cyclical aspect to it.

I think there's a lot of questions that come from these sort of earnings presentations too, especially when it comes to these picks and shovels play, because we try to dig into what does it mean and how far has the AI trade gone, I guess if you will, the picks and shovels trade. Guys, what were some of the unanswered questions that you had kind of coming out of this, or what are you going to be looking for more specifically?

Lou Whiteman (4:19)

Well, they still need to execute.

The good news is that they do see room for growth, but can that capacity expand fast enough to convert that massive backlog into revenue? They still have the same supply chain risks as everyone else. They have a lot of subcontractors that they need to make sure stay in shape. The backlog is great, but delivering on that backlog is not a given. I think that's the biggest thing for investors to watch.