EMCOR (EME) Posts Record Q4 Earnings, '18 Outlook Strong

EMCOR Group Inc. (NYSE:EME) posted fourth consecutive earnings beat, as fourth-quarter 2017 adjusted earnings from continuing operations came in at a record $1.13 per share. The figure trumped the Zacks Consensus Estimate of 86 cents by a whopping 31.4%.

The earnings figure improved 56.9% year over year, driven by higher productivity and improved margins. Solid non-residential construction demand and strong project execution boosted profits.

In 2017, EMCOR reported adjusted earnings from continuing operations of $4.06 per share, up 31.4% from $3.09 reported in 2016.

Inside the Headlines

The company generated a record $2,013 million in revenues, which edged down 3.2% year over year, but surpassed the Zacks Consensus Estimate of $1,932 million.

Revenues in the fourth quarter were primarily fueled by sound performance from the combined U.S. Construction segments along with solid contribution from recent acquisitions.

In 2017, revenues inched up 1.8% year over year to $7.69 billion.

Coming back to the quarter under review, the U.S. Construction segment (up 6.3% year over year) sustained its robust momentum and delivered strong revenues and operating income growth. The segment was driven by the U.S. Mechanical Construction business (up 10.2%). The U.S. Electrical Construction business remained almost flat year over year.

The company’s U.S. Building Services segment revenues moved down 1.1% year over year, remaining pressurized by soft capital spending and the lingering impact of Hurricane Harvey, which deferred turnaround work.

The U.S. Industrial Services revenues, affected by Hurricane Harvey, persistently exhibited a lackluster performance and contracted 1.1% year over year. The hurricane led to a delay in the fall turnaround work and under absorption of overhead costs for projects which the company was unable to execute, which dented margins.

Revenues from total U.S. operations rose 2.2% year over year to $1,916 million. Revenue growth from the U.K. building services continued on growth trajectory and grew 30% year over year to $96.6 million. The upside was driven by profitable new contracts and solid execution in base business.

As of Dec 31, 2017, EMCOR’s backlog was $3.79 billion, down 2.8% year over year.

A rise in the backlog of the U.S. Building Services, U.S. Industrial Services, and U.K. Building Services segments more than offset the dip in backlog for the U.S. Mechanical Construction and U.S. Electrical Construction, resulting in overall growth.

From an end-market perspective, the company witnessed growth in backlog for the commercial, institutional and hospitality markets, which was somewhat offset by the declines in industrial, water & wastewater, healthcare and transportation sectors.

EMCOR’s operating income was $48.5 million, down 16.1% from the prior-year quarter. Operating margins were 2.4%, reflecting a contraction of 140 basis points from the prior-year quarter.

EMCOR Group, Inc. Price, Consensus and EPS Surprise

Liquidity & Cash Flow

EMCOR’s cash and cash equivalents totaled $467.4 million as of Dec 31, 2017, compared with $464.6 million as of Dec 31, 2016. Total debt and capital lease obligations were $269.8 million, declining from $283.3 million recorded on Dec 31, 2016.

In 2017, cash flow used in operating activities totaled $366.1 million, significantly higher than $264.6 million recorded in the year-ago quarter.

Guidance

Encouraged by its accretive acquisitions and increasing traction in the U.S. construction space, EMCOR’s management issued guidance for 2018, with earnings from continuing operations in the range of $4.10-$4.70.

In light of the current size and mix of its backlog and overall positive market conditions, EMCOR expects revenues in the range of $7.6-$7.7 billion.

Our Take

EMCOR ended 2017 on a strong note, as the company set fresh records for net income and outdid revenue expectations as well. Strong performance in the non-residential construction segment has set the tone for robust future growth, reflected in the company’s healthy backlog and 2018 guidance.

Also, a healthy balance-sheet position and increasing market traction added to the company’s strength, indicating bright prospects. Additionally, increasing strength in the non-residential construction markets bodes well for the company. Building Services is also expected to gain from sustained growth in the retrofit and energy savings projects.

Meanwhile, the company sees continued headwinds in its U.S. Industrial Services segment, which is likely to be affected by adverse “new build” heat exchanger fabrication pricing.

We believe that the company’s diverse business structure along with 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 carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the broader construction sector include KB Home (NYSE:KBH) , MasTec, Inc. (NYSE:MTZ) and NVR, Inc. (NYSE:NVR) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

KB Home registered a positive average surprise of 12.9% in the four trailing quarters, beating estimates all through.

MasTec registered a remarkable positive average surprise of 28.1% in the last four quarters, driven by four consecutive beats.

NVR has a decent earnings beat history, beating estimates thrice in the trailing four quarters with an average beat of 11%.

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