High Construction Demand Aids EMCOR (EME) Despite Supply Woes

EMCOR Group, Inc. EME has been witnessing robust demand for its services owing to strong momentum in the U.S. Mechanical and Electrical Construction segments. Solid acquisition strategies and strong liquidity are added positives. Also, upbeat guidance for 2022 bodes well.

However, supply-related challenges, material and labor unavailability and other COVID-associated crisis are a concern. The company is associated with the oil and gas industry, which is highly volatile and may impact EME’s future growth.

Shares of this leading electrical and mechanical construction and facilities service provider have outperformed the Zacks Building Products - Heavy Construction industry in the past year. The performance was backed by robust earnings surprise history, with EME’s bottom line beating the Zacks Consensus Estimate in six of the trailing seven quarters. Earnings estimates for 2022 have moved up 0.3% in the past 30 days, depicting analysts’ optimism over its prospects. The company currently has a VGM Score of A, supported by both Value and Growth Score of A.

Image Source: Zacks Investment Research

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

Growth Drivers

Robust Construction Demand: EMCOR’s domestic construction segments experienced strong project growth in 2020 and 2021, with total Remaining Performance Obligations or RPOs having increased 22% and 15.2% year over year in 2021 and 2020, respectively. It is also witnessing higher demand for electrical-mechanical systems in new construction and retrofit projects.

Within the U.S. Construction umbrella, the Electrical segment saw 11.6% revenues growth and the Mechanical segment witnessed a 12.5% improvement in 2021. EMCOR benefitted from increased project activity within the manufacturing, healthcare and commercial market sectors. With respect to the manufacturing market, the company stated that it is actively engaged in the construction of certain large food processing plants, which is likely to boost sales in 2022.

Upbeat 2022 View: For 2022, EMCOR expects the non-residential market to grow, energy efficiency upgrades to drive HVAC replacement projects, oil & gas markets to improve and the U.K. market to remain strong. EMCOR expects earnings per share within $7.15-$7.85 and revenues between $10.4 billion and $10.7 billion. In 2021, adjusted EPS came in at $7.06 and revenues totaled $9.9 billion.

Inorganic Drive: EMCOR has a penchant for acquisitions and strategic alliances for bolstering inorganic growth as well as expanding market share. During 2021, the company spent $131.2 million on the acquisition of eight companies.

In 2021, EMCOR took over two companies within the United States mechanical construction and facilities services segment. One provides mechanical services within the Southern region and another delivers fire protection services in the Midwestern region. It also acquired two companies that provide electrical construction services for a broad array of customers in the Midwestern region of the United States. This apart, it acquired four companies within the U.S. building services segment, one providing mobile mechanical services across North Texas and three of them delivering either mobile mechanical services or building automation and controls solutions. These buyouts strengthened its overall results by adding new markets, opportunities and capabilities. The company plans to acquire more such companies in the future.

Superior Liquidity: As of Dec 31, 2021, the company had cash and cash equivalents of $821.3 million compared with $902.9 million in 2020-end. EMCOR ended 2021 with a long-term debt and finance lease of $245.5 million, marking a decline from the 2020-end level of $259.6 million. The times-interest-earned ratio at the end of 2021 came in at 88.2 compared with 77 in the third quarter, 74.6 in the second quarter and 34.6 in the first quarter of 2021. This indicates that the company is in a better position to meet debt obligations.

Headwinds

Material & Labor Woes: EMCOR and other industry players like Dycom Industries, Inc. DY, Sterling Construction Company, Inc. STRL and North American Construction Group Ltd. NOA continues to witness material and labor supply-related challenges as well as other COVID-associated crisis.

In 2021, EMCOR’s adjusted operating margin contracted 20 bps in the same period, primarily due to intense inflationary pressure and supply-related woes. The company continued to witness supply chain challenges, in turn resulting in uncertain prices, extended lead times and missed deliveries from suppliers. For 2022, it projects fuel and energy costs to remain a headwind. Also, macro uncertainties like supply chain disruption, inflation and increased COVID-19 mandates are likely to impact the business.

Volatility Oil & Gas Market: Volatility in oil prices remains a primary challenge for EMCOR’s future growth. Near-term prospects for the oil and gas industry look grim and are expected to influence other industries associated with it. The company believes that coronavirus’ impact on the oil and gas market will hurt the industrial services segment. This along with supply chain disruptions, material shortages and escalating commodity prices are a concern.

A Brief Overview of the Other Stocks

Dycom is benefiting from higher demand for network bandwidth and mobile broadband, extended geographic reach along with proficient program management and network planning services. Persistent impacts of a large customer program complexity, lower year-over-year revenues related to other large customers and higher fuel costs are a concern. Nevertheless, the prospects of the Telecommunication business look good, given increased customers’ need to expand capacity and improve the performance of the existing networks and in certain instances, deploy new networks. Dycom expects considerable opportunities across a broad array of customers.

Dycom, currently carrying a Zacks Rank #3, has declined 2.6% over the past year. Earnings for fiscal 2023 are expected to grow 96.7%.

Sterling is currently reaping benefits from the transformed business portfolio and overall project mix toward higher value, lower risk, and more profitable work. The Specialty Services segment has been bolstered by the recent buyout of Plateau. The Residential segment is gaining strength from the faster-than-anticipated recovery of the Texas housing market and its expansion into the Houston market. Meanwhile, the company’s Heavy Civil business has been executing well on substantial, heavy highway work. Its diverse portfolio of end customers and geographies, coupled with the strength of end-markets served, has been driving growth despite headwinds from inflation and the supply chain.

Sterling currently carries a Zacks Rank #3 and has gained 23.2% over the past year. Earnings for 2022 are expected to rise 30.2%.

North American Construction has been benefiting from an increased equipment fleet at the Fort Hills mine and stronger demand for mine support work and equipment rental support at the Kearl mine. Also, the completion of three haul truck rebuilds by an external maintenance program and the acquisition of the Australian component supplier DGI are helping the company to drive growth. Strong operational execution and enough liquidity are adding to the bliss.

North American Construction currently carries a Zacks Rank #3 and has gained 24.1% over the past year. Earnings for 2022 are expected to grow 15.2%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.