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Here's Why Investors Should Hold on to EMCOR (EME) Stock Now

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

So far this year, shares of EMCOR have gained 31.1% compared with the Zacks Building Products - Heavy Construction industry’s 19.6% rally. The price performance was backed by a solid earnings surprise history. EMCOR’s earnings surpassed the Zacks Consensus Estimate in 14 of the trailing 15 quarters. Earnings estimates for 2021 have moved up 4% in the past 30 days.

However, business uncertainties due to COVID-related disruptions and volatility in commodity price remain potential concerns.

Let’s take a look at the factors supporting growth of this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Major Growth Drivers

Inorganic Drive Expanding Footprints: EMCOR depends largely on acquisition of assets and businesses for growth. The company’s acquisition strategies are directed toward buying small private firms with proven management and expansion potential. During the first six months of 2021, the company spent $57 million on the acquisition of three companies. EMCOR took over one company that provides mechanical services within the Southern region of the United States, while another company provides electrical construction services for a broad array of customers in the Midwestern region of the United States. The third buyout comprises a company that provides mobile mechanical services across North Texas, the results of operations of which have been included under its U.S. building services segment. The company’s second-quarter 2021 results include $53.8 million of revenues attributable to the businesses acquired.

Growth in Construction Business: EMCOR — which shares space with Dycom Industries, Inc. (DY - Free Report) , MasTec, Inc. (MTZ - Free Report) and Granite Construction Incorporated (GVA - Free Report) in the same industry — is showing significant strength in the U.S. Mechanical and Electrical Construction segments. The company’s domestic construction segments experienced strong project growth in 2020 with total Remaining Performance Obligations or RPOs having increased $495 million or 15.2% since the end of 2019. The trend continued in first and second-quarter 2021, with RPOs of $4.77 billion and $5.1 billion, respectively. Notably, during the first and second quarter of 2020, the company reported RPOs of $4.4 billion and $4.6 billion, respectively.

For second-quarter 2021, the U.S. Construction segment’s operating margins improved 20 basis points (bps) year over year to 8.4%, on broad-based business growth across trade offerings, end market sectors, and a vast geographic footprint. Despite being impacted by COVID-19, the company sustains its stability on its robust performance, accretive acquisitions and demand for services.

Superior ROE: The company’s superior return on equity (ROE) is also indicative of growth potential. The company’s ROE currently stands at 18.5%. This compares favorably with ROE of 12.9% 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.

Bullish Guidance: Encouraged by favorable project mix and the assumption that current market conditions will improve, EMCOR lifted its 2021 earnings guidance during the second-quarter earnings call. The company now expects earnings per share within $6.65-$7.05 versus 6.35-$6.75 projected earlier. Also, EMCOR raised its revenue guidance to nearly $9.5 billion for 2021 from the prior range of $9.2-$9.4 billion.

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Concerns

EMCOR’s U.S. Industrial Services unit that focuses on petrochemical, and oil and gas refining has been facing the maximum COVID-related woes over time. Its Industrial Services segment had a tough 2020, with U.S. Industrial Services revenues decreasing 26.7%. During the second quarter 2021 too, U.S. Industrial Services revenues decreased 2.5% year over year owing to depressed demand for its service offerings within the oil and gas and related industrial markets, given the negative impact of macroeconomic conditions in the markets served by the company. Also, for the second quarter, the segment generated operating loss of $0.2 million against operating income of $3.3 million a year ago.