ARGAN INC (AGX) stock intrinsic value fair value estimate & owner earnings analysis

Argan is a construction contractor. Almost all of its profit comes from Gemma Power Systems, which designs, builds and commissions natural-gas-fired power plants in the United States under engineering, procurement and construction contracts, plus Atlantic Projects Company, which works on power plants in Ireland and the United Kingdom. Smaller units do industrial field work and fabrication (The Roberts Company) and telecom and utility work in the Mid-Atlantic. The company has no borrowings. Its large cash and investment balance is mostly customer money paid in advance for work still to be done. How we measured earnings. We measured owner earnings as the cash the business generates after removing short-term swings in billings and collections, stock compensation, lease costs and the capital spending needed to keep operating. Per share, over the ten fiscal years ended January 2017 to January 2026, that came to $4.91, $4.64, $2.95, -$2.99, $2.27, $3.30, $2.06, $2.56, $6.21 and $9.97. The swings are what this business looks like. A contractor's earnings follow the gas-plant building cycle and the result of a few large fixed-price jobs. Those ten years cover a full cycle: the 2016-2018 build-out, a drought from 2019 to 2024 when revenue fell from $893 million to $239 million, and today's build-out. The middle value over the cycle is about $3.13 per share, and we treat that as normal mid-cycle earning power. The year to January 2026 was flattered by an unusually low tax rate of about 14%, against roughly 18% in the first half of the current year and a normal rate near 24%. How we treated the cash. At July 31, 2026 Argan held $364 million of cash and $664 million of investments. It also held $627 million of customer prepayments (contract liabilities), on top of $251 million of payables and accrued costs, against $290 million of receivables and other operating assets. That money has already been paid for work Argan still has to deliver, so we counted only the surplus, about $440 million or $31 per share, as owners' money. We also removed the interest earned on that surplus from the earnings stream, about $0.85 per share a year at current yields, so it is not counted twice. A reader who treats all of the cash as free would get a much higher value. We think that would be wrong while this much customer money is sitting in it. What is secured. Project backlog was $2.9 billion at January 31, 2026, up from $1.4 billion a year earlier. It includes an 860 MW gas plant in the ERCOT market in Texas due to finish in 2028 and a 1.4 GW combined-cycle plant in Ward County, Texas due in 2029, both under full notice to proceed. The first half of the current fiscal year confirmed the pace: revenue of $675 million against $431 million a year earlier, and net income of $99 million against $58 million. We treat that backlog as earnings already in hand. We give no credit to contracts not yet signed, even though the company has refilled its backlog in every past cycle. Base case (about $101 per share). The backlog earns about $12.50 per share in the coming year. That is 25% above last year's $9.97, while last year's actual growth was 60% and the first half of this year is already running ahead. Earnings then ease to $11.50, $8 and $4.50 as the big Texas plants finish and new awards replace only part of the work. After that the business earns its mid-cycle level of about $2.83 per share (the $3.13 cycle median less interest on the surplus cash) for as long as it keeps doing what Gemma has done for about two decades: winning and building gas plants through both booms and droughts. The operating business is worth about $986 million. With no debt and $440 million of surplus cash, the shares are worth about $1,426 million, or $101 per share. Bear case (about $57 per share). This case combines the two things that have actually hurt Argan. The first is a fixed-price project going badly, as the UK TeesREP biomass plant did in the year to January 2020, when owner earnings were -$2.99 per share. The second is a long gap in new awards like the one from 2019 to 2024, when owner earnings averaged about $1.69 per share. Here the backlog still earns $10 per share in the coming year, since most of the first half is already booked. A loss on a large job then cuts the next year to $5 and the year after to -$1. The business then earns about $1.40 per share, the drought average less surplus interest. Because a contractor with no hard assets gets no permanent credit in a bad scenario, we stop the earnings after twenty years. The business is worth about $360 million. Plus $440 million of surplus cash and no debt, that gives about $57 per share. Even here the balance sheet carries the company: there are no lenders, and the surplus cash alone covers more than any single loss in the company's history. Bull case (about $123 per share). The backlog runs at strong margins for longer: $13.50 per share for two years, then $12, $10, $8 and $6, as the company keeps refilling backlog at the pace it showed in 2025-2026. After that, earnings settle at the full-cycle average of about $3.30 per share after surplus interest. The business is worth about $1,298 million. With $440 million of surplus cash, that is about $123 per share. We did not credit the idea that data-center power demand keeps the gas-plant boom going indefinitely. It may happen, but nothing signed today shows it. What could make this wrong. Earnings depend on a few very large fixed-price contracts, and three customers accounted for 19%, 16% and 15% of revenue in a recent year. Cost overruns, a customer delaying or cancelling a plant, or a turbine supply problem could wipe out a year's profit, as TeesREP did. Our estimates are also sensitive to the mid-cycle level: if gas-plant building stays strong for a decade, the long-run figure is too low, and if the drought returns sooner, too high. Contract-loss reserves are estimates the auditor identified as a critical audit matter. Our earlier published estimate for Argan was built on a different basis and is not comparable with these figures. Margin-of-safety price. We are fairly sure of the next two years, because they rest on signed contracts and the first half of this year has already delivered them. We are much less sure of anything after 2029, when today's backlog runs out. The worst realistic outcome is a large project loss followed by a long award drought. With no debt and about $31 per share of surplus cash, the company would survive that. Owners would mostly lose the value of the years after the backlog. We are most likely to be wrong about how much of the current boom carries past 2029, about margins on the two Texas plants, and about how much of the cash is truly surplus. If all three go against us, the shares are worth about the bear figure, high $50s. The price assumes a holding period of about three years, the time it takes to finish the current backlog. Over that time the business should add roughly $32 per share of cash in the base case ($14 in the bear) to the $31 already there, and it pays a dividend of around $2 per share. From $50, the base case over three years implies about 30% a year. The bear case implies a small positive return rather than a loss, because the cash and the signed work cover most of that price. The margin-of-safety price is $50.