Acquisition Of Miller Electric Will Expand Presence In Data Centers And Manufacturing

Key Takeaways

• Diversified sector focus and strategic acquisitions, including Miller Electric, position EMCOR for robust revenue growth and stable operating margins.
  
• Emphasis on prefabrication, automation, and skilled labor retention bolsters operational efficiency, supporting sustained or improved net margins and earnings growth.
  
• Potential supply chain issues and competitive pressures could negatively impact margins and earnings, with revenue headwinds and acquisition costs further affecting financial performance.

Catalysts

Provides electrical and mechanical construction and facilities, building, and industrial services in the United States and the United Kingdom.

• The acquisition of Miller Electric Company is expected to contribute meaningfully to EMCOR's revenue growth in 2025, with Miller adding over $700 million in RPOs, potentially driving a significant portion of the company's projected growth for the year. This will positively impact revenue.
  
• The company's focus on data centers, high-tech and traditional manufacturing, health care, energy retrofits, and water and wastewater projects positions them for above-market growth in sectors that are expected to continue to expand, impacting future revenue growth and operating margins.
  
• EMCOR's strong backlog and record RPOs of $10.1 billion, coupled with the addition of Miller Electric, are anticipated to support continued revenue growth and stability in operating margins.
  
• Their disciplined capital allocation strategy, including increased capital investment in the business and a successful acquisition program, positions EMCOR to drive future earnings growth through both organic growth and strategic acquisitions.
  
• The focus on prefabrication, automation, and the retention of skilled labor enhances operational efficiency, which is expected to sustain or improve net margins and contribute to earnings growth.

EMCOR Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming EMCOR Group's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 7.0% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $27.31) by about March 2028, up from $1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.3x on those 2028 earnings, up from 17.5x today. This future PE is lower than the current PE for the US Construction industry at 24.1x.
• Analysts expect the number of shares outstanding to decline by 3.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.26%, as per the Simply Wall St company report.

EMCOR Group Future Earnings Per Share Growth

Risks

• Potential supply chain issues highlighted in 2024 could persist, leading to increased costs and delays in project execution, which would negatively impact operating margins.
  
• The competitive landscape in U.S. and U.K. site-based services may put pressure on pricing, potentially leading to decreased gross profit margins in those segments.
  
• The anticipated $60 million to $70 million revenue headwind in U.S. Building Services due to nonrenewal of certain contracts could result in lower overall revenue and net income in the near term.
  
• The acquisition of Miller Electric, while strategic, will result in intangible asset amortization impacting operating margins by 25 to 30 basis points, potentially offsetting some gains in earnings growth.
  
• Rising tariffs could lead to increased material costs, potentially affecting gross profit margins if the company cannot fully pass these costs onto customers.

Valuation

• The analysts have a consensus price target of $499.8 for EMCOR Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $525.0, and the most bearish reporting a price target of just $445.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $17.7 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 7.3%.
• Given the current share price of $386.54, the analyst price target of $499.8 is 22.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.