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EMCOR (EME) Shares Up 46% YTD: Will the Rally Continue?

Zacks Equity Research

EMCOR Group, Inc. EME is gaining momentum on the back of strong demand across geographies and end markets as well as disciplined project execution. These factors have helped the company post better-than-expected earnings for 11 straight quarters. The stock has surged 46.2% year to date compared with the industry’s rally of 24.3%. However, lower operating margins in the U.S. Mechanical Construction and Facilities Services segment as well as cyclical nature of the industry are concerns.

Let’s discuss the factors that substantiate the company’s Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Growth Catalysts

Solid Construction Business: EMCOR’s U.S. Construction segment, comprising the U.S. Mechanical and Electrical Construction units, has been displaying significant strength. The segment’s robust performance can be attributed to higher project activity within the health care, commercial and transportation markets. In the third quarter, revenues in the total domestic construction business increased 14.3% year over year with 10.4% growth being generated from organic activities.

Aggressive Acquisitions: Post completion of the acquisition of five companies in first nine months of 2019, the company generated incremental revenues of $75.6 million in the third quarter from these buyouts. EMCOR focuses on acquiring small private firms with proven management and expansion potential.

On Oct 4, 2019 the company acquired Batchelor & Kimball, Inc in an all-cash transaction. The buyout has enabled the company to strengthen its position in mechanical construction and maintenance services. Also, it will enhance EMCOR’s capabilities across the South and Southeast regions.

Upbeat View: EMCOR lifted its view for 2019 earnings and revenues during third-quarter 2019 earnings call. This can be attributed to favorable project mix, year-to-date robust performance and the assumption of continuation of current market conditions. It now expects revenues to be $9 billion, up from the previous guidance of $8.8-$8.9 billion. Moreover, it anticipates earnings from continuing operations in the range of $5.65-$5.75 per share, up from prior expectation of $5.50-$5.75. The company is favorably placed to leverage growth base, even as it seeks future strategic investment opportunities.

Concerns

The U.S. Mechanical Construction and Facilities Services segment has been experiencing lower profits due to the mix of work within the manufacturing market (including projects in the earlier stages of completion that carry lower gross profit margins). Notably, the segment’s operating margin declined 80 basis points in the third quarter on a year-over-year basis. Also, operating margin from construction projects within the transportation market declined thanks to the absence of large projects. Moreover, cyclical nature of the markets served by the company, and increase in commodity prices are risks.

Key Picks

Some better-ranked stocks in the Construction sector are Quanta Services, Inc PWR, Orion Group Holdings, Inc ORN and MasTec, Inc. MTZ. Quanta Services and Orion Group sport a Zacks Rank #1, whereas MasTec carries a Zacks Rank #2 (Buy).

Quanta Services’ has three-five year expected earnings per share growth rate of 14.5%.

Orion Group surpassed estimates in two of the trailing four quarters, the average being 74%.

MasTec current year earnings are expected to rise 37.1%.

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