Engineering Success: How EMCOR Shapes Future Of Construction And Infrastructure

Thesis

EMCOR (NYSE:EME), a business in the mechanical and electrical construction industry, shows a strong financial profile characterized by consistent and great revenue growth and strong operational performance. The company’s core focus on expanding sectors like semiconductors, data centers, and sustainable construction, with its lower-than-average P/S and P/E ratios, make me believe it is an interesting investment opportunity.

Introduction

EMCOR is a widely known Fortune 500 company in

• Mechanical and electrical construction,

• Industrial and energy infrastructure

• Building services.

The company has a speciality in designing, building, installing, and maintaining complex mechanical and electrical systems.

These construction services in in a wide range of sectors. Think of commercial, healthcare, education, and government. Their knowledge extends to large-scale projects that require complex engineering and technical skills.

Financial Performance

Click to enlarge

Source: Seeking Alpha (Retrieved on 01-10-2024). Financials in millions USD.

Performance was solid in the latest quarters. Revenue, (gross) profit and margins all increased significantly over the quarters.

I delved deeper into the latest earnings call to find out what caused this performance.

According to the document, out of 13.5% growth in Q3, 12.8% was created organically. I always like seeing a lot of organic sales growth as it shows that the business model is working without “cheating” its sales growth by basically buying it with an acquisition for instance.

Furthermore, the earnings call further delves into where these revenue streams come from.

The higher revenue comes from different sectors. I am talking about the sectors of semiconductors, data centers, manufacturing, healthcare, and retrofit projects.

The advancement of technology and the increasing digitization of many industries have created a huge need for advanced infrastructure. You can think of data centers to handle the surge in data traffic and storage needs. Furthermore, you have manufacturing facilities equipped with the latest technology for increased efficiency and production. Lastly, there are the healthcare facilities with advanced medical equipment and technologies. I believe that this infrastructure is only going to improve, as AI-driven solutions and digitization are a hot thing in healthcare.

The earnings call also states that they are very active in the semiconductor space and actively search for more clients and investments as they notice the importance of the industry. The semiconductor industry has seen a decent expansion due to the growing demand for electronic components used in multiple consumer and industrial products. This increase in demand required intelligent manufacturing facilities. I believe that EMCOR’s expertise in constructing and maintaining complex mechanical and electrical systems comes in handy here, hence the increased revenue.

The high growth in (AI) artificial intelligence, cloud computing, Internet of Things (IoT) applications, and the increase in online services has resulted in a nice increase in the need for data centers, as stated by the earnings call. You can imagine that these facilities require highly specialized electrical and mechanical construction and maintenance services. EMCOR comes in handy for these jobs, again giving a nice boost to revenue and profits.

Moreover, the healthcare sector has been undergoing modernization. I am convinced that this was partly boosted by the COVID-19 pandemic. This modernization involves upgrading existing facilities and constructing new ones with sophisticated medical and research equipment. Thus, these need specialized construction and infrastructure services.

Lastly, there is a growing trend in sustainability and energy efficiency in building construction and maintenance. EMCOR’s services in retrofitting and upgrading existing systems to be more energy-efficient align well with this trend.

The Future

The management stated in the earnings call that EMCOR keeps focusing on sectors such as semiconductors, data centers, high-tech manufacturing, and the electric vehicle (EV) value chain. Some of these I have mentioned in the previous section. I believe that these sectors are the future due to technological advancements and increased digitalization. By targeting these areas, EMCOR is aligning itself with high-growth markets that require specialized services. I see no stopping in this growing demand. Investing in these industries is a smart move by EMCOR to increase its revenue and profits even more.

The company invests in initiatives focused on energy efficiency and sustainability. With the global trend towards greener practices and energy-efficient infrastructure, this focus not only opens up new markets but also aligns EMCOR with regulatory trends and customer preferences. Thus, I believe that this will lead to long-term contracts and steady revenue streams.

EMCOR is likely to benefit from the reshoring and near-shoring trend, where manufacturing facilities are being moved closer to end markets. This trend is likely to lead to increased demand for construction and maintenance services and could directly benefit EMCOR’s financials.

The company is investing in building information modeling (BIM), prefabrication, automation, and robotics. These technologies improve efficiency, reduce project timelines, and can lead to cost savings. This technological advancement can give EMCOR a competitive edge, leading to more business opportunities and potentially higher profit margins due to efficiencies and cost management.

Challenges

EMCOR announced some interesting leadership changes, effective April 1, 2024. Mark A. Pompa, the current Executive Vice President and Chief Financial Officer, will step down. Jason R. Nalbandian, currently the Chief Accounting Officer, will replace him​​​​. Leadership transitions can be challenging for any company, as they involve changes in management style and strategic direction.

The heavy construction industry, of which EMCOR is a part, faces macroeconomic challenges such as labor availability, supply-chain delays, and rising raw material costs​​. These challenges can affect project timelines, costs, and overall profitability.

The industry is exposed to the cyclical nature of the markets in which EMCOR’s clients operate. This exposes the company to risks associated with economic downturns. An economic downturn can lead to reduced demand for EMCOR’s services and impact its financial performance​​.

Valuation

Click to enlarge

Source: Yahoo Finance. The industry medians are calculated with data available from 5 large market cap companies in the Engineering & Construction industry. Data is retrieved on 01-10-2024.

EMCOR’s P/S ratio is lower than both the industry and S&P 500 medians. Furthermore, EMCOR’s P/E ratio is also lower than the industry and S&P 500 medians. EMCOR’s gross margin aligns with the industry median but is significantly lower than the S&P 500 median. This is typical for the construction industry, which generally has lower margins due to high costs of goods sold. EMCOR shows a higher year-over-year revenue growth compared to both the industry and S&P 500 averages, indicating strong revenue performance. EMCOR’s historical earnings growth is also significantly higher than the industry and S&P 500 medians.

When we look at the analysts’ estimates, things look a bit more disappointing for EMCOR. While expected revenue growth is still above the S&P 500 median, it is a bit below the industry median. Furthermore, only 5% growth in earnings is expected, compared to roughly double for the industry and the market. These estimates are probably priced in the valuation of EMCOR, seeing that the P/E ratio and P/S ratio are quite a bit lower than its benchmarks. If the analysts are right, I would agree with the current valuation of the company. However, based on the arguments used in my future section, I expect higher revenue and earnings growth. The industries that have caused the growth in the last 12 months are still hot and in my opinion, will stay hot for a long time. EMCOR knows this and invests in these trends (such as sustainability, automation, etc.). That is why I believe revenue growth and earnings growth will roughly match that of the benchmarks. If this won’t happen in the short term, I do believe it will happen in the medium and long. On that note, I do believe that valuation right now should be much closer to that of the industry and S&P 500, with a discount of about 0% to 10%.

Conclusion

EMCOR’s strong financial performance, indicated by strong revenue and earnings growth, positions it favourably within the heavy construction industry. The company’s focus on high-growth sectors such as semiconductors, data centers, high-tech manufacturing, and sustainability projects cooperate well with current and future market demands. Despite having challenges like leadership transitions and macroeconomic pressures, EMCOR’s lower-than-median P/S and P/E ratios compared to the industry and S&P 500 make me believe that its stock is undervalued. This undervaluation, with its consistent performance and strategic positioning, makes me set the status of EMCOR at bullish.