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EMCOR (EME) Posts Striking Q3 Earnings Beat, Guides Up

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EMCOR Group Inc. EME posted an incredible beat in its third-quarter 2016 results, as its adjusted earnings from continuing operations of 85 cents per share, exceeded the Zacks Consensus Estimate of 76 cents by nearly 12%. The figure also fared impressively year-over-year, surpassing the year-ago tally of 66 cents by 28.8%.

The robust bottom-line performance was driven by an impressive organic growth across the company’s segments, along with streamlined costs and superior operational execution. The company raised its 2016 guidance for the third consecutive time, on the back of impressive backlog levels and an increasing traction in the U.S. construction and industrial services markets.

Net income from continuing operations came in at $51.9 million, up 24.2% compared with $41.8 million in the prior-year period.

Inside the Headlines

The company reported record revenues for the quarter, which rose an impressive 13.2% year over year to $1,923 million, and also surpassed the Zacks Consensus Estimate of $1,868 million significantly. 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.

The U.S. Construction segment (up about 24% year over year) sustained its robust momentum and delivered revenue and operating income growth, driven by the U.S. Mechanical Construction business (up 19%).

The company’s U.S. Building Services segment grew 6.2% year over year, driven by strong performance in our mobile mechanical services operations. The U.S. Industrial Services revenue was relatively flat year over year, as a significant project neared completion.

Geographically, revenues from total U.S. operations jumped 15.5% year over year to $1,850 million. However, revenue growth from the United Kingdom building services was much less impressive, plunging 25% year over year to $73 million in the face of continued headwinds from foreign exchange rates.

As of Sep 30, 2016, EMCOR’s backlog stood at a $3.9 billion, up 3.7% year over year, driven by the continued recovery of the non-residential construction market. A rise in the backlog of U.S. Mechanical Construction and Building Services segments more than offset the dip in backlog for U.S. Electrical Construction, 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 and healthcare markets, which was somewhat offset by the declines in industrial, water and wastewater, hospitality and transportation sectors.

EMCOR’s non-GAAP operating income in the third quarter rose 23% year over year to $86.1 million. Operating margin for the quarter expanded 40 basis points year over year to 4.5%.

Liquidity & Cash Flow

EMCOR’s cash and cash equivalents totaled $504.6 million as of Sep 30, 2016, compared with $486.8 million as of Dec 31, 2015. Long-term debt and capital lease obligations were $378.4 million, declining from $297.6 million recorded on Dec 31, 2015.

Cash flow generated from operating activities for the nine-month period ended Sep 30, 2016 came in at $128.9 million, up from $95.6 million in the year-ago quarter.

Acquisition

In the second quarter of 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.

EMCOR integrated Ardent into its U.S. Electrical Construction and Facilities Services segment.

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.

The company expects the Ardent buyout to be marginally accretive to EMCOR’s 2016 earnings, with the accretion increasing to at least 10 cents per share in 2017.

Guidance Raised

Encouraged by its solid top-line performance, accretive acquisitions and increasing traction in the U.S. construction space, EMCOR’s management raised 2016 guidance, with adjusted earnings from continuing operations now projected in a range of $3.10–$3.20 (up from previous projections of $2.90–$3.10 per share).

Also, buoyed by the current size and mix of its backlog and overall positive market conditions, EMCOR raised its 2016 top-line guidance. For full-year 2016, the company now expects revenues to be roughly $7.5 billion (up from prior projections of a range of $7.4 billion).

EMCOR GROUP INC Price, Consensus and EPS Surprise

EMCOR GROUP INC Price, Consensus and EPS Surprise | EMCOR GROUP INC Quote

Our Take

This was a solid year so far for EMCOR, as the company set new records for revenues, operating income and net income. Outstanding performance in the construction segment, building services and UK segments set the tone for strong future growth, as is reflected in the company’s raised guidance.

Also, a healthy balance-sheet position and increasing backlog added to the company’s strength, indicating bright future prospects. Moreover, increasing traction in the U.S. construction and industrial services markets bode well for the company.

Apart from this, we believe that the company’s diversified business structure, along with its concerted efforts to explore beyond traditional shop-related operations for tapping other profitable areas like food processing and power, will drive long-term growth.

EMCOR currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the broader construction sector include MasTec, Inc. MTZ, DR Horton Inc. DHI and Orion Group Holdings, Inc. ORN.

MasTec, carrying a Zacks Rank #1 (Strong Buy), has registered a remarkable positive average surprise of over 51.5% over the four trailing quarters, driven by three huge beats. You can see the complete list of today’s Zacks #1 Rank stocks here.

DR Horton carries a Zacks Rank #2 (Buy) and has a decent earnings beat history, having surpassed estimates twice over the trailing four quarters for an average beat of 3.5%

Orion Group, also carrying a Zacks Rank #2, has registered a remarkable positive average surprise of over 101.2% over the four trailing quarters, driven by a massive beat.

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