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EMCOR (EME) Q4 Earnings Miss Estimates, Revenues Up Y/Y

Zacks Equity Research

EMCOR Group Inc. EME broke its recent earnings beat streak in fourth-quarter 2016 results, as its adjusted earnings from continuing operations of 72 cents per share missed the Zacks Consensus Estimate of 83 cents by over 13%. The figure also fared poorly in year-over-year comparison, falling 10% from the year-ago tally of 80 cents.

 

 

The bottom-line performance was dragged by a $20.5 million project loss associated with a contract dispute on a completed project within the U.S. Mechanical Construction segment. The company’s manufacturing costs and operating costs also rose significantly, further putting pressure on the bottom line.

Net income from continuing operations came in at $42.2 million, down 16.3% compared with $50.4 million in the prior-year period.

For full-year 2016, net income from continuing operations was $185.1 million, up 7.4% compared with $172.3 million in the year-earlier period.

Inside the Headlines

The company generated remarkable revenues for the quarter, which rose an impressive 9.7% year over year to $1,950 million, and also surpassed the Zacks Consensus Estimate of $1,923 million. 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.

For full-year 2016, EMCOR generated revenues of $7.55 billion, up 12.4% from $6.72 billion in 2015.

Coming back to the quarter under review, the U.S. Construction segment (up about 18% year over year) sustained its robust momentum and delivered strong revenue, and operating income growth, driven by the U.S. Electrical Construction business (up 33.4%). The U.S. Mechanical Construction business grew 9.4% year over year.

The company’s U.S. Building Services segment inched up 0.6% year over year. The U.S. Industrial Services revenue grew 6.8% year over year, driven by a significant field services capital project.

Geographically, revenues from total U.S. operations jumped 11.9% year over year to $1,875 million. However, revenue growth from the UK building services continued to be strained, plunging 26.4% year over year to $75 million in the face of sustained headwinds from foreign exchange rates.

As of Dec 31, 2016, EMCOR’s backlog was $3.9 billion, up 3.5% year over year, supported by the continued recovery of the non-residential construction market. A rise in the backlog of the U.S. Mechanical Construction, U.S. Electrical Construction and U.K. 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, industrial, water & wastewater and healthcare markets, which was somewhat offset by the declines in institutional, hospitality and transportation sectors.

EMCOR’s non-GAAP operating income in the fourth quarter fell 8.5% year over year to $76.9 million.

Liquidity & Cash Flow

EMCOR’s cash and cash equivalents totaled $464.6 million as of Dec 31, 2016, compared with $486.8 million as of Dec 31, 2015. Long-term debt and capital lease obligations were $283.3 million, declining from $297.6 million recorded on Dec 31, 2015.

Cash flow generated from operating activities for the year ended Dec 31, 2016 came in at $264.6 million, slightly lower than $266.7 million in the previous year.

Acquisition

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 10 cents 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 gave optimistic 2017 guidance, with earnings from continuing operations projected in the range of $3.10–$3.50.

Also, buoyed by the current size and mix of its backlog and overall positive market conditions, EMCOR estimates revenues for 2017 to be between $7.5 billion and $7.6 billion.

EMCOR Group, Inc. Price, Consensus and EPS Surprise

EMCOR Group, Inc. Price, Consensus and EPS Surprise | EMCOR Group, Inc. Quote

Our Take

EMCOR wrapped up a solid year, as the company set new records for revenues, operating income and net income. Outstanding performance in the construction segment, building services and industrial services set the tone for strong future growth, as is reflected in the company’s healthy backlog and 2017 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 PulteGroup, Inc. PHM, MasTec, Inc. MTZ and D.R. Horton, Inc. DHI. PulteGroup sports a Zacks Rank #1 (Strong Buy), while MasTec and DR Horton carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

PulteGroup has registered a remarkable positive average surprise of over 13.5% for the four trailing quarters, driven by three beats.

MasTec has registered a remarkable positive average surprise of 61.3% for the last four quarters, beating estimates all through.

DR Horton has a decent earnings beat history, having surpassed estimates thrice over the trailing four quarters, for an average beat of 6.3%

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