I got tired of listening to those Bloomberg Radio commercials about EMCOR so I decided to check them out to see what the hype was all about. EMCOR Group is one of those companies that isn’t overly exciting, they’re downright boring! EMCOR Group (EME) is part of the Construction Services group and they provide their clients with “construction services relating to electrical and mechanical systems in facilities of all types and in providing services for the operation, maintenance and management of all aspects of such facilities.â€
Fundamental Analysis
EMCOR reminds me of the typical engineering company, low gross margins and even lower net profit margins. EME’s current gross profit margin is 11.9% and its net profit margin is a lousy 2.1%. The joke we make about large engineering companies in my field is that they exist just to keep people in employed, not make money! It looks like EME is one of these large corporations that do just this!
It has a PE ratio of 12.9, ROA of 5.1%, ROE of 15.6%, EPS (MRFY) of $1.86, and surprisingly the leader amongst its peer group. EME is outperforming its peers GVA, SXC, PCR, and ARCAY this year! On top of this, analysts expect EME’s earnings to grow between 11.8 to 22.6% this year with its EPS to range between $2.08 to $2.28 (source: S&P). Surprisingly that’s not too bad after all!
Technical Analysis
Technically the chart on EME is short term BEARISH but still long term BULLISH. They reason why I say that is because EME bounced off its 200 WMA and we have not seen a 50/200 WMA death cross happen.
This might be a good place to establish a long term position, a quick monte carlo simulation reveals price levels on the upside of $25, $28, and $31. Immediate downside targets is $22, then $19, and then $16, the worst case scenario is $13.
Neural Net Signal
The EME neural net model indicates no buy or sell signals. In fact the recent market volatility and EME’s price action have made trading EME over the past month a money losing venture.
Bottom line
I like EMECOR because of one reason, our crumbling infrastructure. I’m very BULLISH in the construction services and material sectors over the next 20 to 30 years and I am considering adding any leader, like EME, to my 401k. EME maybe boring and not overly sexy with their profit margins, but if they’re like any other engineering/construction company, they have long term staying power. Consistent growth over a long time wins the game in my mind. Currently its trading its $23.99 and my target for this year will be around $28 to $30/share.
Disclosure: No positions in EME (yet)
I heard that fund managers always go the opposite direction of the masses, when everyone comes in they’re exiting.
So does that mean they’ll be exiting right now? According to the latest S&P report, EME is owned by a lot of institutions.
Their FCF2 looks good, they are trying to move into a oligopsony market place, which when speaking about the government is a good thing. Looking at the % of accounts payable verses liabilities indicates that they are using operating leases to a great extent. Many times companies do this to convey that there ROA is very high and that their long term debt is very low, however, in this case it could be of strategic significance as these are most likely property leases. Property leases can be renegotiated to better reflect current market conditions. I think that the company has potential and I would look at the $10 strike OCT 16 2009 Call options that were last traded at $6.30. That maybe a nice way to have a larger cash reserve available incase something that you like more comes around while still giving you the opportunity to be involved in this position. The Black-Merton-Scholes model has the call priced at about $11.32 so that may be of interest at current levels or a little above as a small part of ones portfolio. At least that’s what I think but I am not all that smart of a guy though.
Black-Scholes is considered to be flawed by Taleb. He uses another option pricing formula (forgot off the the top of my head what its called) that helps factor in volatile markets better. I like EME because of the infrastructure play.