EMCOR Group stock still makes sense (NYSE:EME)
When it comes to complex activities in construction and other industrial spaces, many companies will not hesitate to hire a specialist with experience in the field. This has many advantages with only the cost like a disadvantage. A company dedicated to serving as a specialist contractor focused on electrical construction and installation services, mechanical construction and installation services, construction services, industrial services, etc., is EMCOR Group (NYSE:EME). Although the company has experienced some difficulties as a result of the COVID-19 pandemic, fundamental performance since then has been encouraging. Revenues have surged and management expects that to continue. Add to that the company’s attractive earnings and cash flow, and it should be an attractive prospect for value investors who like a bit of growth. Even compared to similar companies, EMCOR Group seems to be trading cheap.
Times are good for EMCOR Group
The last time I wrote about the EMCOR Group was in December 2021. At that time, I applauded the continuous improvements that management was showing. I said at the time that the shares of the company were not cheap. However, I also said that they were not expensive. In the end, I felt like the good outweighed the bad, which led me to view the company as a buying prospect. Since then, the market has experienced a major downturn. As of this writing, the S&P 500 has fallen in value by 10.8%. This is not materially different from the 10.6% decline seen by EMCOR Group investors. While it’s never nice to see your portfolio drop, this type of drop relative to the broader market shouldn’t be viewed negatively either.
If you were to guess the fundamental performance achieved by EMCOR Group based on recent swings in the company’s share price, you might think that business conditions are deteriorating. But that couldn’t be further from the truth. When I last wrote about the company, we only had data covering the third quarter of its 2021 fiscal year. Now we have data covering the rest of 2021. data illustrate is that the company continues to grow at a rapid pace. You see, between 2016 and 2019, the company’s revenue grew from $7.55 billion to $9.18 billion. The COVID-19 pandemic caused revenue to drop to around $8.80 billion. For 2021, however, sales reached an impressive $9.90 billion. This translates to a 12.6% increase over what the business generated in 2020. It is also 7.9% more than with the business generated a year prior. Part of this growth, of approximately $196.3 million in total, is attributable to the management of acquisitions completed. However, the company also saw increases due to a return to project activity in major metropolitan areas that had previously postponed projects due to the pandemic.
Just as revenues have increased, profitability has also increased. Based on available data, net income for fiscal 2021 was an impressive $383.5 million. That’s almost triple the $132.9 million in profit generated a year earlier. It is also well above the $325.1 million in revenue the company generated in 2019. Of course, there are other profitability metrics to pay attention to. One of them is operating cash flow. Interestingly, this metric actually deteriorated from 2020 to 2021, dropping from $806.4 million to just $318.8 million. In fact, the reading given for 2021 was the worst the company has seen since 2018. That said, if we adjust for changes in working capital, the picture is markedly different. Operating cash flow would be $527.2 million. That compares to $451.8 million recorded a year earlier and is the highest ever for the company. Meanwhile, we also have EBITDA. It has also increased year over year, eventually reaching $654.3 million in 2021. This compares to the $609.6 million seen for 2020 and the $563.5 million generated a year prior.
Regarding the company’s 2022 fiscal year, management provided some guidance. They currently forecast revenues between $10.4 billion and $10.7 billion. Midway through, this would translate to a year-over-year growth rate of 6.5%. Earnings per share are expected to be between $7.15 and $7.85. Halfway through, that translates to a net profit of about $395 million. Cash flow from operations is expected to be $328.4 million, with the adjusted reading totaling $543 million. And EBITDA is expected to be around $673.9 million. Operating cash flow and EBITDA were estimated by myself by taking year-over-year growth rate and profitability and applying them to these two metrics.
With this data, we can easily establish the price of the company. On a price/earnings basis, using the company’s estimates for 2022, the company is trading at a multiple of 15.5. This compares to the 15.9 reading we get if we rely on 2021 numbers. The price to adjusted operating cash flow multiple should be 11.3. That’s down from the 11.6 reading we get if we go by the 2021 numbers. And finally, we have the EV to EBITDA multiple. It’s an impressive 8.2. This compares to the 8.5 we get if we rely on 2021 results. The reason this multiple is so much lower than others is that, in part, the company benefits from excess cash over debt. of $388.2 million.
To put the price of the company into perspective, I decided to compare it to five similar companies. Four of those five companies had a positive price-earnings ratio they were trading at. The range for them was 11.5 to 38.8. One of the five companies was cheaper than our prospect. I then did the same using the price vs. operating cash flow approach, giving me a range for the five companies between 4.8 and 149.2. In this scenario, two of the five companies were cheaper than the EMCOR group. And finally, we have the EV to EBITDA approach. This gives us a range of 8 to 88.7. In this case, only one of the companies is cheaper than our target.
|Company||Prizes / Earnings||Price / Operating Cash||EV / EBITDA|
|Fluor Corp (FLR)||N / A||149.2||88.7|
|Sterling Construction (STRL)||11.5||4.8||8.0|
|USA Comfort Systems (FIX)||22.0||17.5||13.4|
|NV5 Global (NVEE)||38.8||17.8||17.7|
|Northwest Pipe Co (NWPX)||23.3||7.5||11.7|
At present, the EMCOR group seems to be doing quite well. Whether that continues to be the case is something investors will have to judge for themselves based on ongoing evaluation of the company. But regardless of market conditions, we can see that management has consistently focused on growing the business. I still maintain that stocks are not in the trash. However, they seem to be cheap and are even cheaper than the last time I wrote about them. For this reason, in addition to the quality that operations management has been so successful in cultivating, I maintain my “buy” rating on the company.