EMCOR (EME) Down 5.6% Since Earnings Report: Can It Rebound?
Zacks Equity Research
Updated
It has been about a month since the last earnings report for EMCOR Group, Inc. EME. Shares have lost about 5.6% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock’s next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
EMCOR Posts Record Q1 Earnings, Revenues, Guides Up
EMCOR posted record first-quarter 2017 results, as its adjusted earnings from continuing operations of $0.88 per share trumped the Zacks Consensus Estimate of $0.68 by 29.4%.
The figure fared even better in year-over-year comparison, increasing a whopping 54.4% from the year-ago tally of $0.57.
The bottom-line performance was driven by solid top-line growth and cost efficiency, which trickled down to the bottom line.
Inside the Headlines
The company generated record revenues for the quarter, which rose an impressive 8.4% year over year to $1,891.7 million, and also surpassed the Zacks Consensus Estimate of $1,798.3 million. Interestingly, it was EMCOR’s eight consecutive quarter of record year-over-year revenue growth. Organic revenue growth for the quarter came in at 4%.
Strong revenue growth in the quarter was primarily driven by broad-based, robust organic performance across the company’s domestic segments, along with solid contribution from its recent acquisitions. Particularly, the electrical and mechanical construction segments saw robust execution.
In terms of end-markets, the quarter witnessed particularly strong execution in commercial, manufacturing, healthcare and transportation markets.
In the quarter under review, the U.S. Construction segment (up about 16.5% year over year) sustained its robust momentum and delivered strong revenue, and operating income growth, driven by the U.S. Electrical Construction business (up 27.2%). The U.S. Mechanical Construction business grew 10.3% year over year.
The company’s U.S. Building Services segment revenues edged down 0.7% year over year. The U.S. Industrial Services revenue grew a modest 0.4% year over year.
Geographically, revenues from total U.S. operations jumped 9.4% year over year to $1,812.7 million. However, revenue growth from the UK building services continued to be strained, declining 9.8% year over year to $79 million, as start-up costs associated with the timing of new projects hurt the segment.
As of Mar 31, 2017, EMCOR’s backlog was $3.97 billion, up 3.2% year over year, supported by a strong domestic market.
A rise in the backlog of the U.S. Mechanical Construction, U.S. Electrical Construction and UK Building Services segments more than offset the dip in backlog for U.S. Building Services and U.S. Industrial Services segments, resulting in overall growth.
From an end-market perspective, the company witnessed growth in backlog for the commercial, water & wastewater, hospitality and healthcare markets, which was somewhat offset by the declines in industrial, institutional and transportation sectors.
EMCOR’s non-GAAP operating income came in at $82.8 million, up 46% compared with $56.7 million in the prior-year quarter. Operating margins came to 4.4%, reflecting an improvement of 120 basis points over the prior-year period.
Liquidity & Cash Flow
EMCOR’s cash and cash equivalents totaled $302.8 million as of Mar 31, 2017, compared with $464.6 million as of Dec 31, 2016. Total debt and capital lease obligations were $280.4 million, declining from $283.3 million recorded on Dec 31, 2015.
Cash flow used in operating activities for the quarter ended Mar 31, 2017 came in at $5.2 million, significantly lower than $37.2 million in the previous year.
Acquisition
During the quarter, the company acquired two firms — one in fire protection and one in mechanical services. Both acquisitions will add unique capabilities to EMCOR's portfolio and broaden its geographic footprint.
In second-quarter 2016, EMCOR completed the acquisition of Ardent Services, L.L.C. and Rabalais Constructors, LLC (collectively called Ardent) for a price of $205 million in cash. Ardent is an established provider of electrical and instrumentation services to the energy infrastructure market in North America.
Ardent will fortify EMCOR’s market-leading position in electrical construction and services, and will also serve to expand its capabilities in the energy and industrial sectors, particularly in the gulf coast, western and mid-continent regions. EMCOR integrated Ardent into its U.S. Electrical Construction and Facilities Services segment. The company expects the Ardent buyout to be accretive to EMCOR’s 2017 earnings by at least $0.10 per share.
Guidance Raised
Encouraged by its solid top-line performance, accretive acquisitions and increasing traction in the U.S. construction space, EMCOR’s management raised its 2017 guidance, with earnings from continuing operations projected in the range of $3.20–$3.50 (up from previous projections of $3.10–$3.50).
In light of the current size and mix of its backlog and overall positive market conditions, EMCOR reiterated revenue guidance for 2017 to be between $7.5 billion and $7.6 billion.
How Have Estimates Been Moving Since Then?
Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.
EMCOR Group, Inc. Price and Consensus
EMCOR Group, Inc. Price and Consensus | EMCOR Group, Inc. Quote
VGM Scores
At this time, EMCOR's stock has a nice Growth Score of 'B', though it is lagging a lot on the momentum front with an 'F'. However, the stock was allocated a grade of 'B' on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.
Zacks' style scores indicate that the stock is suitable for value and growth investors.
Outlook
The stock has a Zacks Rank #2 (Buy). We are looking for an above average return from the stock in the next few months.
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