Why Powell Industries Rallied Today

Shares of Powell Industries (NASDAQ: POWL) rallied on Tuesday, up as much as 15.6% on the day, before settling into an 11.1% gain by 1:47 p.m. EDT.

Powell produces a wide variety of power and electric generation and management systems for industrial sites, and has traditionally focused on the oil & gas and chemical markets. However, the AI data center build-out now requires sophisticated, high-power systems, which Powell specializes in.

The massive step-up in AI-related demand was evident in last night's earnings release and call, in which Powell disclosed that the company had received a "mega order" that was not only its largest in history, but also larger than last quarter's entire revenue by a fair amount.

Massive new orders overshadow an earnings miss

Powell's March quarter revenues and earnings missed analyst estimates, with revenue growing 6% to $297 million and earnings per share declining 1% to $1.25. However, since Powell provides large industrial projects, revenue recognition and profits can be lumpy from quarter to quarter.

The company's main segments did grow at a much stronger pace. The Commercial & Industrial segment, which serves AI data centers, was up 35%. The Electric Utility segment was up 14%, and even the traditional Oil & Gas segment was up 11%. However, counteracting these gains was a big decline in the Petrochemical segment, which fell 37%.

The big news, however, was that new order numbers overwhelmed the actual reported results. New orders in the quarter totaled $490 million, up a whopping 97% over the prior year quarter. Not only that, but management also disclosed that after the quarter's end in April, Powell received a single "mega order" for an AI data center project totaling $400 million.

That's an absolutely massive single order, dwarfing the company's entire March quarter revenue by 33%! Thus, it's no wonder that the stock surged higher after an initial decline on the headline results.

Image source: Getty Images.

Powell's high valuation looks justified

At first glance, Powell may seem overvalued. The stock is up 181% year-to-date, and is trading at 58 times earnings, which seems high for an industrial stock. However, the company's huge order growth and the mega-deal on top of that mean there should be a lot of revenue and earnings growth "in the pipeline" for investors, so to speak.

It's hard to know how long this AI build-out will last, but if it goes beyond this year, Powell's high-flying stock price looks justified.

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.