Limbach Holdings (NASDAQ:LMB) performs better than expected

introduction

I’ve only written two articles Limbach Holding Company (Nasdaq: LMP) since June 2023, but this stock has become one of my most successful picks here at Seeking Alpha – since last updateLMB is up a whopping 79% versus the S&P 500 (SP500) (SPX) Index 24.86%:

Since it’s been six months since I last looked at LMB, I’d like to update my coverage today and take another look at LMB’s future prospects – is there still potential for further growth in the stock?

Latest financial data and developments

Limbach is a leading building systems solutions company specializing in mission-critical mechanical, electrical, and plumbing services. The company designs, installs and maintains these systems in large buildings. According to investor relations materials, Limbach operates in two segments: general contractor relations (GCR) and direct owner Relationships (ODR), with GCR (construction and renovation projects involving MEP services) representing 37.6% of total sales in the first quarter ODR delivers construction projects directly to building owners or property managers.

In the first quarter of fiscal 2024, the company’s online debt settlement segment saw a significant revenue increase of 26.46% year-over-year, contributing $74.3 million, accounting for 62.4% of consolidated revenue and 71.3% of gross profit. Despite a slight decline in total revenue to US$119.0 million, gross profit increased 18.5% to US$31.1 million, driven by higher margins in the direct debt settlement segment:

Overall, LMB is in the process of making a strategic shift from GCR to ODR in order to achieve higher margins for the consolidated business in the long term. This obviously explains the decline in ODR revenue (and total consolidated revenue) in the first quarter — this is how management explained this dynamic during a recent earnings call:

Revenues declined slightly, as a result of a deliberate strategy to shrink the GCR business in favor of ODR and thus increase margins.

Despite the decline in sales, we see this strategic shift paying off – consolidated gross margin is growing very quickly (from 21.7% last year to 26.1% in Q1FY2024), and given strong operating leverage, we are also seeing earnings before interest Taxes and depreciation. Growth of 40.4% year-on-year and corresponding margin expansion from 3.85% last year to approximately 5.5% in the last quarter of the report.

Net income in the first quarter rose even further – by 153.5% to $7.6 million, equivalent to $0.64 per diluted share, which was more than enough to beat the consensus estimate even amid the missing top line:

As far as I can see, the focus on ODR is working well so far (take a look at the growing margins and overall profitability). Also, Limbach’s balance sheet remains strong, with $48.2 million in cash and equivalents and a current ratio of approximately 1.60 (higher than the generally accepted ratio of 1). Management plans to continue investing in the online debt settlement sector to “drive further growth and shareholder value, leveraging its strong financial position and disciplined business engagement” – based on these plans, I assume we should see a continuation of current trends in terms of leverage and profitability soon:

It is also noteworthy that Limbach revised its revised EBITDA guidance for fiscal 2024 upward to a range of $51-55 million (3.9% higher, comparing medium-term values), reflecting confidence in its strategic shift towards a settlement business. Higher profit margin online debt:

What I like about the LMB approach is the transparency of business processes: management sets clear goals for its immediate future and takes strategic steps that are easy to follow. For example, IR’s most recent presentation shows that LMB wants to achieve 80% of its turnover from ODR after FY 2024. What are they doing to achieve this? In addition to everything I described above, Limbach is actively purchasing other companies to expand the scope of online dispute resolution. During fiscal 2023, Limbach acquired two companies for a total of $15.3 million – a manufacturing company from TN ($5 million) and an engineering company from NC ($13.5 million). Both companies will be operated in the ODR sector, increasing LMB’s presence in the United States.

In my view, LMB is growing and developing in the right direction: with strict liquidity control and cash on the balance sheet, the company is smoothly moving into a higher-margin and economically stable segment, which I believe should lead to multiple expansions. . But where is the fair price for LMB?

Limbach stock valuation update

Let’s do the math together. If we assume Limbach gets 80% of all revenue from ODR in 2024 and beyond and this segment’s margin remains at 28.9% (average of the four quarters of 2023), gross profit for the full fiscal year 2024 should be about $149 million. (If the $505 million revenue consensus is even close to reality.) Assuming EBITDA/gross profit remains at the current level of 34.3% this year, we should achieve EBITDA of $51.1 million (+20% YoY) – this is within management’s guidance range but Not a modified number. In other words, when adjusted for individual items, adjusted EBITDA should be even higher. What’s more, net profit should be much higher, taking into account current operating leverage and reduced interest expenses. I don’t see analysts forecasting “much higher” EPS growth than what you and I just calculated.

I expect LMB’s FY2024 EPS to be 15% higher as the company continues to beat estimates for the reasons outlined above. With expected EPS of $2.61, this gives an implied P/E of 20.7 times – not much considering a) margins are rising and will only grow for the foreseeable future and b) the sector average is slightly higher, although rates Low LMB growth is several times higher than average.

If we assume that LMB stays at its current P/E ratio of 23.8x through the end of the year, the stock should trade at approximately $62 with expected EPS of $2.61. The “fair value” you come up with is 15% above today’s market price – let that be your target price.

Risks to consider

I risk repeating my “buy” rating on LMB today.

FirstlyI can’t say exactly where the company has a ceiling in terms of gross margin. Maybe we are already getting close to it, and then it will be very difficult for LMB to continue to show margin expansion, which could explain the increase in the valuation premium.

secondThe company’s business depends heavily on economic cycles, and any downturn in the US economy could have a tangible impact on Limbach’s business.

third, the multiples I think are fair — especially the current P/E ratio of 23.8x — look pretty high. The company may miss its current EPS forecast, which will likely lead to a broad sell-off as the valuation looks very rich today.

the fourthTechnical analysis shows the risk of a correction after LMB failed to gain a foothold above $59-60 per share recently. If there is a mean retracement to the 200-day moving average (which coincides with the medium-term trend level), we may see a 15% correction from current levels.

Bottom line

Despite the many risks, I try to look at Limbach from the point of view of facts and fundamentals.

• The company continues to grow earnings before interest, tax, depreciation, and amortization (EBITDA) and earnings per share (EPS) by focusing on higher-margin businesses;
• Management is raising its adjusted EBITDA forecast, which may indicate that margins are growing faster than previously assumed;
• LMB is actively expanding in various regions of the US and is rapidly approaching its goal of generating 80% of sales from ODR.

Based on my analysis of future EBITDA and EPS, I believe LMB is still an undervalued company. In my opinion, the upside potential is 15%, but it could be higher if management’s strategic plans are implemented faster than I expect.

So I’m maintaining my “Buy” rating on LMB today.

thank you for reading!