Markets & Finance

For EMCOR, the Building Boom Goes On


Shares of the commercial construction outfit soared Monday after it boosted its 2007 earnings outlook

Yes, some builders are still enjoying strong demand for their services -- they're just not on the residential side of the business. Riding a worldwide boom in commercial construction, EMCOR Group Inc. (EME) said on June 11 it was boosting its revenue forecast for the year by $200 million and raised its earnings outlook by 30 cents per share. The company said it sees continuing signs of strong demand patterns within many of its markets.

The largest engineering and construction company in the U.S. now expects to post earnings of $2.75 to $3.00 per share for 2007, versus an earlier projection of $2.45 to $2.80 per share. Revenue is now projected at between $5.5 billion and $5.7 billion, up from a previous range of $5.3 billion to $5.5 billion.

On June 8, EMCOR announced its board had approved a two-for-one stock split in the form of a 100% stock distribution. On July 9, 2007, each stockholder of record on June 20 will receive one additional share of common stock for each share then held. The number of shares outstanding will go from about 32.15 million to roughly 64.30 million.

The higher projected results come two months after the Norwalk, Conn., company reported a 14.5% increase in sales and a 36% jump in its project backlog from a year earlier to $3.8 billion. Three-quarters of the revenue gain came stemmed from growth within existing businesses rather than through acquisitions.

"The backlog strongly indicates at least a year and a half of very good visibility," analyst Alex Rygiel, who covers EMCOR for Friedman, Billings, Ramsey, said in an interview with BusinessWeek. "And their balance sheet has net cash, which positions them very well to look at acquisitions to diversify, both domestically and internationally."

EMCOR's international business consists mainly of the United Kingdom and Canada.

The $8.67 per outstanding share, or about $278.7 million, in cash that EMCOR reported on its balance sheet at the end of March was most likely generated by improved contract terms, D. A. Davidson & Co. said in a research report on April 26.

In a news release on June 11, Chairman and Chief Executive Frank T. MacInnis attributed EMCOR's increasing sales to "outstanding growth opportunities" in the commercial, healthcare, gaming and hospitality markets, as well as ongoing strong demand for mobile and site-based facilities services. EMCOR's competitive edge in time-sensitive, highly-complex projects, for which it is more and more being recognized, can be seen in continued growth in its contract backlog first-quarter levels, MacInnes said.

The stock was trading 9.2% higher at $70.64 in late NYSE trading June 11.

Driving the company's higher sales is the Mechanical Construction business, where a 35% gain in revenue and slightly wider margins in the first-quarter stemmed from higher investment in non-residential building activity, with demand rising for heating, cooling and piping for both new construction and upgrades.

Healthcare projects accounted for $359 million, or 9.3%, of the company's project backlog for the first quarter. A month ago, the company declared it had $200 million in newly awarded contracts from some of the leading healthcare providers in the country. The biggest of these is for the Johns Hopkins Hospital in Baltimore, where EMCOR will design and install fire protection systems for two linked 15-story tower buildings used for clinical operations, and the hospital's new main entrance.

"The mix in the backlog is improving towards higher-margin, more technical projects within end markets that are showing strong [growth], including commercial construction, healthcare and hospitality," Rygiel said.

EMCOR is surpassing other large electrical and mechanical contractors as a result of the many years of experience it has accumulated on larger, highly technical projects, Rygiel said. Its gains are also coming from the larger scale on which it operates, with much larger projects than most of its peers and working for the most part in the larger metropolitan regions.

Given that EMCOR lags the non-residential construction cycle, and that that the industry is currently midway to a performance peak, Rygiel predicted many years of continued growth.

EMCOR is exposed to the risk of rising interest rates that could hurt the domestic economy and cause a slowdown in non-residential construction.

But the company will continues to become less cyclical as it diversifies, and investors should be willing to pay for this, Rygiel said in a research report. He has an outperform rating on the stock and raised his price target to $79.

Rygiel doesn't own EMCOR shares and FBR doesn't have investment banking ties with the company. Davidson does or seeks to do investment banking with EMCOR.

Bogoslaw is a reporter for BusinessWeek's Investing channel.

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