Menu
Companies that embark on a roll-up strategy by acquiring several companies often end up with a highly leveraged balance sheet. But there are remarkable exceptions. I recently discovered a company that has maintained a robust balance sheet while managing over 100 subsidiaries. Effective integration of acquisitions is pivotal to their growth strategy. This innovative company recently unveiled a $500 million share repurchase program, representing about 3% of its market cap at the time of the announcement. The company has already retired more than 14% of its shares outstanding over the last three years.
Let’s take a closer look at this company.
EMCOR Group, Inc. (EME): $356.86
Market Cap: $16.77B
EV: $16.28B
Key Insights
EMCOR Group, Inc. is a Fortune 500 company based in Norwalk, Connecticut. A provider of critical infrastructure systems, EMCOR companies give life to new structures and sustains life in existing ones by planning, installing, operating, maintaining, and protecting sophisticated and dynamic systems such as electrical, mechanical, lighting, air conditioning, heating, security, fire protection, and power generation systems—in virtually every sector of the economy and for a diverse range of businesses, organizations, and government. It specializes in mechanical and electrical construction, industrial and energy infrastructure, and building services. The company comprises 100 or more operating companies, has approximately 180 locations, and employs over 38,000 people.
Recently, MSCI added EMCOR to the ACWI (All Country World) Index, along with MicroStrategy Incorporated (MSTR) and Pure Storage (PSTG). This is a broad market index that tracks companies in developed and emerging markets around the world.
Business Model
EMCOR makes money through three main channels:
Benefiting From Recent Trends
The rapid advancement of technology and the increasing digitization across industries have driven a significant need for advanced infrastructure. This demand has been fueled by the AI boom, cryptocurrency mining, and the rise in clean technology manufacturing.
The global data center construction market, valued at $213.55 billion in 2022, is projected to grow to $409.43 billion by 2031, with a CAGR of 7.5% from 2024 to 2031. These facilities require specialized electrical and mechanical construction and maintenance services, presenting significant growth opportunities for specialty contractors like EMCOR.
EMCOR also benefits from the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA). Together, these acts represent a $1.25 trillion investment by the government over the next 5-10 years in transportation, energy, water resources, and broadband sectors.
Record Remaining Performance Obligations (RPOs)
RPO represents the total contracted revenue from services or products yet to be delivered to customers and not yet recognized as revenue by the company. EMCOR’s RPOs have seen a steady rise over the years. It reached a record $9.18 billion in Q1 2024, marking a 16.5% increase year-over-year, driven by strong performance in the mechanical and electrical construction segments. This reflects the company’s strong future revenue stream.
Source: Emcor (Earnings Presentation)
Geographic Expansion
Over the past few years, the company has expanded its geographic presence. In 2019, it operated in three data center markets, but through greenfield expansions and bolt-on acquisitions, it now services nine. On the mechanical side, it expanded from serving one major market in 2019 to six today.
Management and Recent C-Suite Transitions
EMCOR’s management team is highly experienced, with significant tenure within the company. CEO Anthony J. Guzzi has been with EMCOR since October 2004, serving as President, then Chief Operating Officer until January 2011, and CEO since then. Before joining EMCOR, he was President of Carrier Corporation’s North American Distribution and Aftermarket Division.
Mark A. Pompa, the company’s Executive Vice President and CFO since April 2006 stepped down recently, succeeded by Jason R. Nalbandian, the current Senior Vice President and Chief Accounting Officer.
Mr. Matz, the Executive Vice President-Shared Services also recently left after nearly three decades with the company.
It’s crucial to consider how the departure of these two executives, especially the CFO, each with nearly thirty years of tenure at EMCOR, might impact the company’s future performance.
Peers
EMCOR is the second largest specialty contractor in the U.S. by revenue, trailing only Quanta Services, Inc. (PWR), which has a market cap of more than twice that of EMCOR. The company outperforms its peers, including AECOM (ACM) and Quanta Services, with superior gross and net margins. The contractor stands out as the only company among its peers with a clean balance sheet and no debt.
Source: SeekingAlpha
Capital Allocation
EMCOR strikes a balance in its capital allocation strategy through acquisitions, dividend payments, and share buybacks. The company recently approved a quarterly dividend of $0.25 per share, marking a 39% increase from the previous dividend of $0.18. Over the past three years, EMCOR has grown its dividends at a CAGR of 23.44%. Its modest dividend yield (FWD) of 0.27% coupled with a low payout ratio of 5.2% and healthy cash flows, leave a lot of room for future dividend increases.
Source: Emcor (Earnings Presentation)
Share Repurchase
On June 7, 2024, EMCOR announced that its Board of Directors increased its share repurchase program by an additional $500 million, approximately 3% of its market cap at the time of announcement. EMCOR has been actively executing these buybacks, having retired over 16% of its outstanding shares in the past four years, as shown in the shares outstanding graph below.
Financials
Over the past decade, EMCOR has more than doubled its revenue, growing from $6.2 billion in 2012 to $12.6 billion in 2023. The company has significantly enhanced its profitability, with net income increasing by over 300% during this period. Despite a modest gross margin of 16.6%, EMCOR manages to squeeze out 5% of net income margin. Its EPS has grown at a CAGR of 22.52% over the last ten years. Free cash flow has also seen substantial growth over the years.
Healthy Balance Sheet
As of the end of the last quarter, EMCOR held $840.99 million in cash and cash equivalents. The company maintains a strong balance sheet with net cash of approximately $495 million and an additional $1.2 billion available under a revolving credit facility. EMCOR is well-positioned to fund organic growth, pursue strategic acquisitions, and return capital to shareholders.
Insider Activity
Recently, a few insiders, including EMCOR’s CEO, have been selling the company’s shares. This activity is likely due to the substantial rise in the stock price over the past few years. It might also suggest that these insiders believe the stock price may have limited potential for further significant increases from its current level.
Valuation
EMCOR is currently trading at a forward P/E ratio of 22.5, which is an 8% premium compared to the industry average of 20.8. Analysts estimate EMCOR’s EPS to grow 21.78% this year and 6.43% next year. Revenue is also expected to increase by 14.11% in 2024 and 7.7% in 2025. While valuation is reasonable, the expected slowdown in both revenue and earnings growth in 2025 is a concern.
Q1 2024 Results
Emcor reported strong first-quarter results. The CEO commented,
“The company had an exceptional start to the year, sustaining momentum throughout the first quarter and setting new records in key financial and operational metrics. Our confidence is reinforced by the significant year-over-year increase in our remaining performance obligations and a healthy project pipeline, all of which provide us with strong visibility into the remainder of the year and is reflected in our increased financial guidance for 2024.”
The company updated its 2024 guidance, with the following increases:
Source: Emcor (Earnings Presentation)
Risks
Bottom Line
As management states, EMCOR has been securing the right projects in the right markets. EMCOR benefits from resilient demand in end markets such as data centers, high-tech manufacturing, semiconductors, and life sciences, fueled by trends like reshoring, nearshoring, increasing AI adoption, and a focus on energy efficiency and sustainability. Accretive M&A activities are also contributing to overall revenue growth. The company’s target markets are expanding due to these long-term trends, and they may pursue further acquisitions to grow even more.
EMCOR’s strong balance sheet positions it well for additional bolt-on M&A, complemented by a robust backlog of work (RPOs). Ample federal support further enhances their prospects. Upward revisions in earnings estimates and strong EPS growth can continue to drive the stock higher. We felt the same way looking at EMCOR as we did with ITT last year as discussed in this Buyback Wednesdays article and look forward to exploring the idea more for inclusion in our portfolio.
Welcome to edition 91 of Buyback Wednesdays, a monthly series that tracks the top stock buyback announcements during the prior month. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.
The number of companies announcing buybacks has nearly halved, dropping from 112 last month to 55 this month.
1. Oramed Pharmaceuticals Inc. (ORMP): $2.58
On June 26, 2024, the Board of Directors of this pharmaceutical company announced that it had approved a new $20 million share repurchase program, equal to around 19% of its market cap at announcement.
| Market Cap: $104.62M | Avg. Daily Volume (30 days): 212,230 | Revenue (TTM): $674K |
| Net Income Margin (TTM): 1,551.34% | ROE (TTM): 6.48% | Net Cash: $146.06M |
| P/E: 9.94 | Forward P/E: N/A | EV/EBITDA (TTM): 3.18 |
2. Xunlei Ltd (XNET): $1.68
On June 4, 2024, the Board of Directors of this internet-based digital media company announced that it had approved a new $20 million stock repurchase agreement. This represents around 16.5% of its market cap at announcement.
| Market Cap: $108.7M | Avg. Daily Volume (30 days): 70,132 | Revenue (TTM): $344.79M |
| Net Income Margin (TTM): 4.85% | ROE (TTM): 5.2% | Net Cash: $254.89M |
| P/E: 6.45 | Forward P/E: N/A | EV/EBITDA (TTM): -17.17 |
3. Melco Resorts & Entertainment Ltd (MLCO): $6.99
On June 3, 2024, the Board of Directors of this casino gaming and resort operator announced that it had approved a new $500 million share repurchase program, equal to around 14% of its market cap at announcement.
| Market Cap: $3.10B | Avg. Daily Volume (30 days): 2,022,490 | Revenue (TTM): $4.17B |
| Net Income Margin (TTM): -5.53% | ROE (TTM): N/A | Net Debt: $6.45B |
| P/E: N/A | Forward P/E: 27.13 | EV/EBITDA (TTM): 10.54 |
4. Caterpillar Inc. (CAT): $327.76
On June 12, 2024, the Board of Directors of this construction equipment manufacturer approved an additional $20 billion share repurchase program, equal to around 12.4% of its market cap at announcement. With the new authorization, Caterpillar Inc. may repurchase up to approximately $21.8 billion of its common stock.
| Market Cap: $160.29B | Avg. Daily Volume (30 days): 3,695,960 | Revenue (TTM): $67B |
| Net Income Margin (TTM): 16.79% | ROE (TTM): 62.79% | Net Debt: $33.49B |
| P/E: 14.86 | Forward P/E: 15.42 | EV/EBITDA (TTM): 12.16 |
5. Light & Wonder Inc. (LNW): $102.95
On June 16, 2024, the Board of Directors of this cross-platform games company authorized a new $1 billion stock repurchase program, equal to around 12% of its market cap at announcement.
| Market Cap: $9.19B | Avg. Daily Volume (30 days): 1,360,640 | Revenue (TTM): $2.99B |
| Net Income Margin (TTM): 7.46% | ROE (TTM): 23.28% | Net Debt: $3.48B |
| P/E: 42.86 | Forward P/E: 25.02 | EV/EBITDA (TTM): 12.83 |
If you are reading this article and have not signed up to receive such articles by email, please sign up for our free, IA Plus or IA Premium service here. If you are an existing subscriber, you can login to the InsideArbitrage.com website to adjust the kinds of articles you receive by email by turning on or turning off specific categories of articles.
Disclaimer: Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.