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EMCOR (EME) Posts Record Q2 Earnings, Raises Guidance Again

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EMCOR Group Inc. (EME - Free Report) posted impressive second-quarter 2017 results, as its adjusted earnings from continuing operations of 95 cents per share trumped the Zacks Consensus Estimate of 80 cents by 18.8%. The earnings figure was flat year over year.

However, record GAAP net income from continuing operations of 95 cents compared favorably with the year-ago tally of 92 cents. The bottom-line performance was primarily driven by solid non-residential construction demand and strong project execution.

Inside the Headlines

The company generated $1,896 million in revenues for the quarter, which edged down 1.9% year over year, but came ahead of the Zacks Consensus Estimate of $1,876 million. Till the last quarter, EMCOR had delivered eight consecutive quarters of record year-over-year revenue growth.

Strong revenue growth in the quarter was primarily driven by sound performance from the combined U.S. Construction segments, along with solid contribution from its recent acquisitions. Particularly, the U.S. electrical and mechanical construction segments saw robust execution, with organic revenue growth of 5% and 15%, respectively.

In the quarter under review, the U.S. Construction segment (up about 13.8% year over year) sustained its robust momentum and delivered strong revenue, and operating income growth, driven largely by the U.S. Mechanical Construction business (up 18.6%). The U.S. Electrical Construction business grew 6.8% year over year.

The company’s U.S. Building Services segment revenues moved down 5.4% year over year. The U.S. Industrial Services revenue fell drastically, down 43.8% year over year.

Geographically, revenues from total U.S. operations declined 1.4% year over year to $1,816.7 million. Revenue growth from the UK building services continued to be strained, down 12.6% year over year to $79.2 million.

As of Jun 30, 2017, EMCOR’s backlog was $4.10 billion, up an impressive 7.6% year over year with book-to-bill at the highest level in almost two years, supported by a strong domestic market.

A rise in the backlog of the U.S. Mechanical Construction, U.S. Electrical Construction, and UK 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, institutional, hospitality and healthcare markets, which was somewhat offset by the declines in industrial, water & wastewater and transportation sectors.

EMCOR’s non-GAAP operating income came in at $92.8 million, almost flat compared with the prior-year quarter. Operating margins came in at 4.9%, reflecting an expansion of 10 basis points over the prior-year period.

EMCOR Group, Inc. Price, Consensus and EPS Surprise

Liquidity & Cash Flow

EMCOR’s cash and cash equivalents totaled $385.4 million as of Jun 30, 2017, compared with $464.6 million as of Dec 31, 2016. Total debt and capital lease obligations were $276.9 million, declining from $283.3 million recorded on Dec 31, 2016.

Cash flow used in operating activities for the quarter ended Jun 30, 2017, came in at $102.9 million, significantly higher than $47.8 million recorded in the previous year.

Acquisition

In first-quarter 2017, the company had acquired two firms — one in fire protection and one in mechanical services. Both acquisitions add unique capabilities to EMCOR's portfolio and broaden its geographic footprint.

In second-quarter 2016, EMCOR completed the acquisition of Ardent Services, L.L.C. and Rabalais Constructors, LLC (collectively called Ardent). 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 anticipates the Ardent buyout to be accretive to EMCOR’s 2017 earnings by at least 10 cents per share.

Guidance Raised

Encouraged by its impressive top-line performance, accretive acquisitions and increasing traction in the U.S. construction space, EMCOR’s management raised its 2017 guidance, with earnings from continuing operations projected in the range of $3.40–$3.60 (up from previous projections of $3.20–$3.50). The mid-point of the guided range reflects a 13% year-over-year increase in diluted earnings from continuing operations.

In light of the current size and mix of its backlog and overall positive market conditions, EMCOR raised its revenue guidance for 2017 to $7.6 billion, up from the previously expected range of $7.5–$7.6 billion.

Our Take

EMCOR has had a decent first half of the year 2017, as the company set new records for net income and outdid revenue expectations as well. Outstanding performance in the construction segment 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 market traction added to the company’s strength, indicating bright future prospects. In addition, increasing strength in the U.S. construction markets bode well for the company.

The company sees headwinds in its U.S. Industrial Services segment, which will be affected by difficult year-over-year comparisons created by the large specialty service project in the second and third quarters of 2016.

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 KB Home (KBH - Free Report) , Meritage Corporation (MTH - Free Report) and NVR, Inc. (NVR - Free Report) , each boasting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

KB Home registered a positive average surprise of 12.5% for the four trailing quarters, beating estimates all through.

Meritage registered a remarkable positive average surprise of 14.2% for the last four quarters, driven by consecutive beats.

NVR, Inc. has a decent earnings beat history, having surpassed estimates thrice over the trailing four quarters for an average beat of 14.2%.

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