EMCOR To Gain From Solid Construction Activity & Buyouts

EMCOR Group, Inc. (NYSE:EME) is poised to benefit from robust construction primarily in the non-residential markets along with consistent acquisitions.

Notably, shares of EMCOR have surged 53.4% so far this year compared with the industry’s 30% rally. The price performance was backed by a solid earnings surprise history. EMCOR’s earnings surpassed the Zacks Consensus Estimate in all the trailing seven quarters. Earnings estimates for fiscal 2019 have moved up 0.5% in the past 30 days.

However, lower operating margins in the U.S. Mechanical Construction and Facilities Services segment is a concern.

EMCOR’ Q3 Performance

EMCOR reported third-quarter 2019 results in October, with earnings and revenues surpassing the Zacks Consensus Estimate by 2.8% and 5.5%, respectively. Earnings and revenues also grew 6.6% and 11.8% year over year, respectively, buoyed by strong demand and disciplined project execution.

Let’s delve into the factors that substantiate the company’s Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Major Growth Drivers

Solid Construction Business: EMCOR’s U.S. Construction segment — comprising the U.S. Mechanical and Electrical Construction units — has been displaying significant strength. The segment’s robust performance was backed by consistent demand from the end-markets and solid project execution across its business. In the third quarter, revenues in the total domestic construction business increased 14.3% year over year with 10.4% growth being generated from organic activities.

Aggressive Acquisitions: Post completion of the acquisition of five companies in first nine months of 2019, the company generated incremental revenues of $75.6 million in the third quarter. EMCOR emphasizes on acquiring small private firms with proven management and expansion potential.

Recently, EMCOR acquired Batchelor & Kimball, Inc in an all cash transaction. The buyout has enabled the company to strengthen its position in mechanical construction and maintenance services. Also, it will enhance the company’s capabilities across the South and Southeast regions.

Upbeat View: EMCOR lifted its view for 2019 earnings and revenues during the third-quarter 2019 earnings call. This can be attributed to favorable project mix, year-to-date robust performance and the assumption of continuation of current market conditions. It now expects revenues to be $9 billion, up from the previous guidance of $8.8-$8.9 billion. Moreover, it anticipates earnings from continuing operations in the range of $5.65-$5.75 per share, up from prior expectation of $5.50-$5.75. The company is favorably placed to leverage growth base, even as it seeks future strategic investment opportunities.

Concerns

Lower Operating Profit: The U.S. Mechanical Construction and Facilities Services segment has been experiencing lower profits due to work mix within the manufacturing market (including projects that are in the earlier stages of completion and typically carry lower gross profit margins). Notably, the segment’s operating margin declined 80 basis points in the third quarter on a year-over-year basis. Also, operating margin from construction projects within the transportation market declined thanks to the absence of large projects.

Key Picks

Some better-ranked stocks in the Zacks Building Products - Heavy Construction’s industry include Orion Group Holdings, Inc (NYSE:ORN) , North American Construction Group Ltd (TSX:NOA) and Sterling Construction Company, Inc (NASDAQ:STRL) . Orion and North American sport a Zacks Rank #1, while Sterling carries a Zacks Rank #2 (Buy).

Orion and Sterling’s current year earnings are expected to rise 54.1% and 30.1%, respectively.

North American’s earnings surpassed estimates in all of the trailing four quarters, the average being 8.5%.

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