Limbach: The Story Only Got Better

seekingalpha09-09

Limbach Holdings has returned more than 100% since my last coverage, and I count it among my biggest winners in a market that has been brutal for small caps.Limbach's margins have continued to be in ...

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Narai Chal/iStock via Getty Images Limbach Holdings (NASDAQ:LMB) has been the biggest winner among the ones I covered here on Seeking Alpha in the last year. I felt it prudent to revisit my thesis a year after my coverage and see if the story holds.   SA Recap of my last coverage   Investor Presentation I believed Limbach was a compelling investment opportunity as it was a hidden gem in the industrial sector and operating under the radar (Only two Wall Street analyst ratings) and at the time AI-related names were the dominant force in the market (Still are to a certain extent). Limbach Holdings specializes in mechanical, plumbing, and electrical services essential to maintaining mission-critical systems. Despite being in a less \"hot\" industry, the company showed remarkable resilience and growth, achieving a 344% return over one year. Generally, there is some hesitation to pull the trigger if a stock has been up so much in a year. Still, I was always of the belief that a stock's past returns should not dictate the thesis and only provide a narrative, not an argument for investment or disinvestment. The company's ability to tighten its belt during periods of slowing revenue, improve gross margins, and maintain a healthy balance sheet demonstrated a strong operational strategy. Its solid cash position, low debt, valuation, heavy insider buy, and improving key financial metrics such as ROE, ROA, and ROIC were all factors that contributed to my 'Buy' Rating. Caution from my last coverage Limbach was of course not a perfect company, and I left the door open for future areas of uncertainty. My concerns revolved around the following.  Good job on cost efficiency so far, but it might face limits on further savings and a saturated market. Future growth will likely rely on strategic acquisitions and expansion into new areas, and these opportunities are hard to come by Potential downturns in new construction might dent future earnings  A Year since then Limbach's Margins have continued to be in an uptrend and at the highest levels The margins for Limbach Holdings have risen more than I expected, and the company's strategy to focus more on the higher-margin ODR business has paid off, leading to record-high gross margins. Additionally, effective cost management and operational efficiency have contributed to improving operating margins.   Margins YoY (Tikr)  Margins comparable quarters (Tikr) Recent Performance: For the quarter ending Q2 2024, the gross margin was 27.4%, which is a significant increase from 22.8% in Q2 2023. The gross margin for TTM was 25.24%. The operating margin was 7.61%, up from 6.18% in Q2 2023. The operating margin for the TTM was 7.03% The Owner-Direct Relationships (ODR) segment has been a major contributor to the high gross margins, with ODR gross profit margin expanding to 30.6% in Q2 2024 from 29.3% in Q2 2023. The General Contractor Relationships (GCR) segment also saw an increase in gross margin to 20.6% in Q2 2024 from 17.1% in Q2 2023 Geographic Expansion & Tuck-In Acquisitions strengthening market share & footprint In line with strengthening its higher margin ODR business, Limbach Company has been targeting its acquisitions that aid in this objective. In the last year, the company has acquired ACME Industrial, Industrial Air (IA), and Ken Island Mechanical. The company is being selective and opportunistic in evaluating these opportunities to find the right strategic fit, and I see several positives from these acquisitions.   Investor Presentation 1. Limbach is diversifying its service offerings by acquiring companies with specialized capabilities (like KIM's emergency solutions and IA's specialty contracting). This diversification can help insulate the company from market fluctuations in any single service area. 2. The acquisitions demonstrate Limbach's focus on expanding its geographical footprint, particularly in the eastern United States (KIM has a presence in the D.C. metro area, IA in the Carolinas) 3. These acquisitions suggest Limbach is pursuing an aggressive growth strategy, likely aimed at becoming a more comprehensive provider of building systems solutions. Best of all, these acquisitions are small, have no impact on balance sheet health, and are funded from operational cash flows (More cash than its total debt, debt to equity ratio has reduced from 88% to 7.2%) Data by YCharts It reminds me of the flywheel approach that I have seen at other successful serial acquirers. The elements of the flywheel support and reinforce each other, and I hope this concept is realized at Limbach successfully.   Author Designed Potential downturns in new construction (Risk) So the company managed to allay 2 out of 3 areas of uncertainty for me, but one continues to remain which is the outlook for the construction industry. As it goes the long-forecasted recession may finally make its presence and while Limbach may not have to take the full impact (its presence in mission-critical systems shields it from the worst of macroeconomic trends), it may still be noticeable enough that it takes a hit to its topline. As such, there are a few indicators from the economy that we may be taking a bad turn. According to the U.S. Census Bureau, construction spending in July 2024 showed signs of a slowdown:  Total construction spending was estimated at a seasonally adjusted annual rate of $2.162B, which is 0.3% below the revised June estimate of $2.169B. Private construction spending decreased by 0.4% compared to the previous month, with both residential and non-residential sectors showing declines   Limbach's valuation accounts for an optimistic future Part of the reason for my Buy rating last time was that I thought the valuation was compelling in light of their improvement in profitability. However, what I see now is the market is rewarding that a bit excessively, with the price running ahead of valuation. It trades at an earnings multiple of 28.3x and across all of its valuation metrics it ranks close to its highest values (The below percentile rank shows that in most instances the valuation metrics were more than 90% lower than what it is now)   Percentile Rank for Valuation (Koyfin) But on the flip side, this can be reasoned well as its margins and profitability are at their highest levels compared to its own history (The below percentile rank shows that in most instances the metrics were lower than what it is now)   Percentile Rank for Margins and Profitability (Koyfin) I believe the market is paying a premium for the quality of the company's operations. The market appears to be pricing in the company's strong profitability, strategic shift towards higher-margin business, solid financial health, and promising growth prospects. Could the premium valuation also reflect investor confidence in Limbach's ability to deliver consistently strong results across economic cycles and capitalize on its market opportunities? There are some clues from its latest Q2 2024 earnings call, and it appears that the company has momentum on its side -  As we continue to pick up the pace on transition to business, we’re increasing our total revenue and adjusted EBITDA guidance ranges for the full year 2024. Adjusted EBITDA for the full year is now expected to be in the range of $55 million to $58 million, which is up from our previous guidance of $51 million to $55 million that we presented in Q1. And our expected full year total revenue guidance range is now $515 million to $535 million, up from $510 million to $530 million, which is our previous range. - Michael McCann, President and CEO  Reiterating my Buy  I believe the stock continues to be a Buy. Over the short term, we may see some gyrations as the stock market looks to be on shaky footing as of now, which may affect Limbach's stock. However, investors believing in the long-term prospects would benefit from its growth strategy and operational efficiency, which may well make it a long-term compounder.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.27.0","shortVersion":"4.27.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2466185138"}