Why Powell Industries Surged Today

Shares of industrial power systems company Powell Industries (NASDAQ: POWL) rallied 12.7% on Wednesday as of 12:17 p.m. EDT.

Powell held its earnings release last night, and while its top-line revenue figures appeared lackluster, the company did an excellent job of increasing its margins and profits. Furthermore, Powell delivered super-strong orders, giving investors visibility into future growth.

Powell is transitioning from oil and gas to the electricity boom

In the first quarter, Powell grew revenue by just 4% to $251 million, missing expectations. However, earnings per share surged 19% to $3.40, which was well ahead of expectations. The earnings outperformance came from an increase in Powell's gross margin to 28.4%, up from 24.7% in the year-ago quarter.

What's really impressive about that figure was that management pointed only to a "stable" pricing environment, attributing the increase to strong execution. This can happen if Powell receives a fixed fee for manufacturing, installation, and service of its power control switchgear equipment, but can deliver it more efficiently. Meanwhile, most segments actually grew strongly, but a 31% decline in the petrochemical segment put a cap on the top-line figures.

In addition to margin improvement and execution, what really drove the stock higher was a significant bump in the company's order book of $439 million in the quarter -- a 63% acceleration from the prior-year quarter and the highest figure in over two years. Management attributed the growth to landing its first "megaproject" in the AI data center market, along with a "very large" LNG project on the Gulf Coast.

Image source: Getty Images.

Powell is a huge AI beneficiary

Powell stock had already been on a strong run, but this extra bump does seem well-deserved. Traditionally a provider of complex electrical systems to the oil and gas exploration and refining industry, Powell's expertise in delivering complex, highly reliable power control systems is now also needed for AI data centers, as well as electric utilities required to serve those data centers, with utilities now investing in power generation at a rate not seen in decades.

So, from LNG generation through the conversion of that gas to electricity to the delivery of that electricity to the data center, Powell serves each of these end markets. Despite its recent strong run and a valuation of nearly 35 times earnings, Powell's success appears well-deserved.

Billy Duberstein and/or his clients have positions in Powell Industries. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.