EMCOR Group, Inc. (EME - Free Report) has been riding on solid non-residential construction demand and strong project execution, which has shored up its earnings in recent quarters. We believe the company has several growth drivers in place and enjoys a robust foothold in its served markets, which will likely help it maintain the growth momentum in the times to come.
Let’s discuss some of these growth drivers and also shed light on some of the risks that the company is vulnerable to.
EMCOR has been witnessing sturdy revenue growth in recent times,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 are seeing robust execution, in the recently reported second-quarter 2017 results these segments witnessed organic revenue growth of 5% and 15%, respectively. The U.S. Construction segment (up 13.8% year over year) also sustained its robust momentum and delivered strong revenues, while the U.S. Electrical Construction business grew 6.8% year over year.
In light of the current size and mix of its backlog and overall positive market conditions, EMCOR’s management had raised its revenue guidance for 2017 to $7.6 billion, up from the previously expected range of $7.5-$7.6 billion.
Further, EMCOR’s acquisition strategies have been lending momentum to the company’s operations as well. Over time, these buyouts fortified EMCOR’s market-leading position in electrical construction and services, and expanded its capabilities in the energy and industrial sectors.
We are highly optimistic about EMCOR’s recent acquisition of Ardent, which will solidify EMCOR’s position in electrical construction and services, and expand its capabilities in the energy and industrial sectors, particularly in the gulf coast, western and mid-continent regions. The company anticipates the Ardent buyout to be accretive to its 2017 earnings by at least 10 cents per share. This will likely provide a strong boost to the company’s numbers.
Encouraged by its impressive top-line performance, accretive acquisitions and increasing traction in the U.S. construction space, EMCOR’s management also raised its 2017 guidance, with earnings from continuing operations projected in the range of $3.40-$3.60 (up from the previous projections of $3.20-$3.50). The mid-point of the guided range reflects a 13% year-over-year increase in earnings from continuing operations.
Furthermore, the executive order signed by Trump last month to accelerate approvals of permits for highways, bridges and other major building efforts (as part of his proposal to spend $1 trillion to fix aging U.S. infrastructure) will provide a boost to EMCOR’s operations.
However, the company has been facing headwinds in its U.S. Industrial Services segment, which continues to be vulnerable to the volatility in oil and gas prices. EMCOR has witnessed a slowdown in its industrial backlog on account of the uncertainty in oil & gas markets, as companies cut back on capital spending in the downstream and midstream markets that EMCOR caters to.If such volatility persists, then a majority of the large oil and gas companies will continue to reduce the capital expenditure, which poses a major threat for the company.
Also, greater political uncertainty, triggered by the Brexit vote, is adding to the company’s concerns as its U.K. customers are still assessing its short- and long-term implications. This could harm the company’s U.K. Building Services segment.
Other Stocks to Consider
Some other companies working in the same space as EMCOR are MasTec, Inc. (MTZ - Free Report) , Chicago Bridge & Iron (CBI - Free Report) and Sterling Construction Company Inc (STRL - Free Report) .
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