EMCOR Group, Inc. EME is benefiting from accretive acquisitions and a robust construction business. The U.S. Electrical and Mechanical Construction and Facilities Services segments are witnessing strong project growth over the years due to the company’s disciplined project execution strategies and acquisition policies.

The above-mentioned tailwinds helped EMCOR report the impressive fourth-quarter 2022 results. In the quarter, the company’s earnings and revenues surpassed the Zacks Consensus Estimate by 15.4% and 2.8%, respectively, and increased year over year. The quarterly results reflect strong demand across geographies, solid remaining performance obligations and bolt-on acquisitions.

Shares of EME have gained 35% over the past six months compared with the Zacks Building Products - Heavy Construction industry’s growth of 15.7%. Earnings estimates for 2023 have shown improvement in the past 30 days, portraying the possible prospects for the company.

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However, this mechanical and electrical construction, industrial and energy infrastructure, and building services provider is affected by supply-chain disruptions, intense economic inflation and the cyclical nature of the market.

Tailwinds

EMCOR’s strategic acquisition plan aimed to buy small private firms with proven management and expansion potential bode well. In 2022, EMCOR acquired six companies, spending $100.8 million. The acquired companies in the Greater Boston area and the Midwestern region of the United States were included in the U.S. Electrical Construction and Facilities Services segment.

The other acquired companies in the Northeastern and Southern regions of the United States were included in the U.S. Mechanical Construction and Facilities Services segment. Adding to these, the U.S. Building Services segment included two companies, one in the Southwestern region and the other in the Southern region of the United States. These acquisitions portrayed long-term growth prospects, even during the volatile economic condition.

The U.S. Construction segment has been maintaining strong momentum. The company’s major segments, primarily the U.S. Mechanical and Electrical Construction segments, continue to display significant strength. Within the U.S. Construction umbrella, the U.S. Electrical Construction and Facilities Services segment revenues increased 19.9% year over year in 2022, with organic revenue growth of 13.2%, backed by increased revenues from the commercial and healthcare market sectors and certain transmission and distribution projects.

Also, during the period, the U.S. Mechanical Construction and Facilities Services segment revenues rose 9.5% from the year-ago level due to significant increases in commercial and healthcare market sectors.

Headwinds

EMCOR continues to witness supply-related challenges and high inflationary pressures. Supply-chain delays due to the Russia-Ukraine war have resulted in increased input costs and project delays. The company witnessed project delays in U.S. Construction segments due to the revision of estimated costs to complete a performance obligation and estimated transaction prices.

The inflationary pressures have resulted in interest rate hikes, which increased the company’s interest expenses. In 2022, the gross and operating margins declined 70 basis points (bps) and 30 bps on a year-over-year basis, respectively. The company expects these headwinds to continue in 2023, affecting its growth prospects.

EMCOR’s business, which is susceptible to the cyclical nature of the markets in which its clients operate, is dependent upon the timing and funding of new awards. Investment decisions of the customers may vary in terms of location or as a result of factors like the availability of labor, relative construction costs or competitive conditions in their industries. Also, reduced or delayed spending by the federal government and state and local governments may have a material and significant impact on business.

Zacks Rank & Key Picks

EME currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the Zacks Construction sector are:

United Rentals, Inc. URI currently carries a Zacks Rank #2 (Buy). Shares of URI have gained 30.8% in the past six months. The long-term earnings growth rate of the company is 16.3%.

The Zacks Consensus Estimate for URI’s 2023 sales and EPS indicates growth of 20.3% and 28.3%, respectively, from the previous year’s reported levels.

Sterling Infrastructure, Inc. STRL currently carries a Zacks Rank #2. STRL has a trailing four-quarter earnings surprise of 19.3%, on average. Shares of the company have gained 55.8% in the past six months.

The Zacks Consensus Estimate for STRL’s 2023 sales indicates a 0.8% decline, while that for EPS suggests 10.8% growth.

Skyline Champion Corporation SKY currently carries a Zacks Rank #2. SKY has a trailing four-quarter earnings surprise of 43.2%, on average. Its shares have rallied 23.8% in the past six months.

The Zacks Consensus Estimate for SKY’s fiscal 2024 sales and EPS indicates a decline of 11.7% and 37.9%, respectively, from the previous year.

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