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EMCOR (EME) Rallies 93% in Past Year: More Upside Left?

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EMCOR Group, Inc. (EME - Free Report) has been benefiting from solid execution in the U.S. Mechanical Construction segment and disciplined cost control amid the COVID-19 pandemic.

Notably, shares of EMCOR have gained 92.8% over the past year compared with the Building Products - Heavy Construction industry’s 90.3% rise. Apart from the above-mentioned tailwinds, the price performance was backed by a solid earnings surprise history. EMCOR’s earnings surpassed the Zacks Consensus Estimate in 13 of the trailing 14 quarters. Earnings estimates for 2021 have moved up 4.2% in the past 60 days. This positive trend signifies bullish analyst sentiments and justifies the company’s Zacks Rank #2 (Buy), indicating robust fundamentals and expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Major Growth Drivers

Construction Business Driving Profitability

EMCOR’s U.S. Construction segment — comprising the U.S. Mechanical and Electrical Construction units — has been showing significant strength. The segment’s robust performance is primarily attributable to the consistent demand from end-markets served and successful project execution throughout business despite coronavirus-related disruptions. For first-quarter 2021, the U.S. Construction segment’s operating margins improved 230 basis points (bps) from last year, supported by solid cost structure and productivity levels. Despite COVID-19 impacts, the company maintains stability on strong performance, strategic acquisitions and demand for services.

During 2020, total Remaining Performance Obligations or RPOs increased $495 million or 15.2% from the end of 2019. The trend continued in first-quarter 2021 with RPOs of $4.77 billion, up from $4.59 billion at 2020-end and $4.42 billion a year ago. EMCOR continues to see demand for electrical mechanical systems, both in new construction and retrofit projects. Throughout the quarter, it experienced strong year-over-year growth in all sectors served, except hospitality. Commercial projects, which make up 44% of total RPOs, increased $314 million year over year and $216 million sequentially.

Accretive Acquisitions

EMCOR depends largely on acquisition of assets and businesses for growth. The company is more inclined toward buying small private firms with proven management and expansion opportunities. In first-quarter 2021, the company acquired two companies — one providing mechanical services within the Southern region and the other delivering electrical construction services in the Midwestern region — for a purchase consideration of $24 million.

During 2020, EMCOR completed three acquisitions which include a company providing building automation and controls solutions within the Northeastern region of the United States, a full-service provider of mechanical services within the Washington, DC, metro area, and a company that provides mobile mechanical services in the Southern region.

Through these acquisitions, EMCOR boosted its business by including new markets, opportunities and capabilities.

Upbeat View

EMCOR — which shares space with Dycom Industries, Inc. (DY - Free Report) , MasTec, Inc. (MTZ - Free Report) and North American Construction Group Ltd. (NOA - Free Report) in the same industry — has raised its earnings guidance for 2021 owing to favorable project mix and the assumption that current market conditions will improve. The company now expects earnings per share within $6.35-$6.75 versus $6.20-$6.70 projected earlier. The Zacks Consensus Estimate for the same is currently pegged at $6.70.

Superior ROE

EMCOR’s superior return on equity (ROE) is also indicative of growth potential. The company’s ROE currently stands at 17.9%. This compares favorably with ROE of 10.07% for the industry it belongs to. This indicates efficiency in using its shareholders’ funds and EMCOR’s ability to generate profit with minimum capital usage.

Zacks Investment ResearchImage Source: Zacks Investment Research


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