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Balanced Risk-Reward for EMCOR Group

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On April 4, 2014, we issued an updated research report on EMCOR Group Inc (EME). The company’s business has been benefiting from its strong fundamentals and recent contract wins. Moreover, EMCOR had reported strong first-quarter fiscal 2014 results in February, which included a positive surprise of 8.6%.

EMCOR has been consistently focused on streamlining its business by exiting from the non-profitable U.K. construction market while strengthening its core businesses. The company has also been gaining traction from higher investments in oil and gas infrastructure. Moreover, EMCOR is reaping benefits from the successful integration of RepconStrickland, a leading industrial and refinery service company acquired in July 2013.

Last month, EMCOR was awarded a couple of lucrative contracts. Its subsidiary, F&G Mechanical Corp won a contract for Marbella II Development project in New Jersey and its Poole & Kent Company received a contract from Miami Dade County for constructing one of the Master Pump Stations to expand sewer system capacity in key regions of Florida.

The flurry of deals followed robust fourth-quarter 2013 results with adjusted earnings of 76 cents per share that surpassed the year-ago tally by 1.3%. On Jan 13, 2014, the company had also raised its quarterly dividend by 33% to 32 cents (or $1.28 annually) to provide attractive risk-adjusted returns to its stockholders.

The company’s commitment toward improving its performance while increasing shareholder returns reflect its free cash flow generating capability, sound liquidity position and solid growth prospects. Currently, the expected long-term earnings growth rate for the stock is 15.0%.

However, the company’s organic growth has been persistently declining for the past six quarters. Also, a part of EMCOR’s revenues depends on new constructions. Growth forecasts and earnings estimates are likely to be negatively affected if construction of new commercial or industrial buildings slows down due to a challenging economy.

The company also derives a considerable share of revenues from government projects and hence, is susceptible to any changes in federal rules and regulations. Additionally, the company has a significant portion of fixed-price contracts, which could weigh on its margins going forward.

Stocks That Warrant a Look

EMCOR currently has a Zacks Rank #3 (Hold). Investors interested in this sector could consider better-ranked stocks like India Globalization Capital, Inc. (IGC), VSE Corp. (VSEC) and MasTec, Inc. (MTZ). All three stocks carry a Zacks Rank #2 (Buy).

Read the Full Research Report on EME
Read the Full Research Report on VSEC
Read the Full Research Report on MTZ
Read the Full Research Report on IGC

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