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Limbach Holdings, Inc. (NASDAQ:LMB) currently looks intriguing as a potential investment due to the low valuation and strong growth expected in 2024. The recent share price drop looks like a good buying opportunity.
Limbach is a building systems solutions company offering mechanical, electrical and plumbing services. [MEP] services. Limbach specializes in mission-critical solutions where the reliability of these systems is important. The company is involved in the design, installation and maintenance of MEP systems. These systems are installed in large buildings/facilities.
Limbach operates two segments: General Contractor Relations [GCR] and direct relations with the owner [ODR]. The GCR segment comprises 49% of total revenue and includes construction manager or general contractor contracts for new construction and renovation projects involving MEP services. The ODR segment comprises 51% of total revenues and provides construction projects and/or MEP services directly to building owners or property managers.
Limbach Market Growth Drivers and Trends
Limbach faces a promising and growing market in the coming years. The global MEP market is expected to grow at 11.5% annually reach $192 billion in 2027. This should provide a strong and significant tailwind for Limbach.
One of the main trends for the MEP market in 2024 is the decision to build or improve buildings to achieve energy efficiency. The trend is to balance sustainability and efficiency. Part of this is driven by the International Energy Agency's Net Zero Emissions goal, which requires that all new buildings and 20% of existing buildings be prepared to eliminate carbon emissions by 2030. Of course, making HVAC and other systems become more efficient can save building owners/operators. long-term money. Additionally, there are government programs that provide incentives for businesses to make energy efficiency improvements, such as insulation, lighting, and HVAC systems. This may drive an increase in projects for Limbach in the coming years.
Another trend is to build or improve buildings with resilience in mind. This is due to the high prevalence of severe weather conditions such as hurricanes, wildfires, and floods. Building owners are showing interest in making their buildings more resilient to these risks. This involves the use of high-performance materials such as carbon fiber, graphene and electrical steel. This trend could spur more projects for Limbach as companies scramble to secure their facilities.
The use of AI (artificial intelligence) is another trend in the construction industry. AI is used in this market to improve product design, improve cost control, optimize scheduling, and more. Limbach uses AI to help its clients Track and better understand the performance of your facility assets. This can help reduce downtime and be proactive about equipment repairs and replacements. It is also used to improve operational efficiency and energy usage. These solutions can save money, providing a strong incentive for current customers to upgrade and attract new potential customers.
One of the challenges in the market is that engineering and construction companies face cost volatility. This implies higher labor and material costs in recent years. Key materials such as iron/steel and wood are still priced above pre-pandemic levels. Machinery and equipment costs increased 26% since before the COVID pandemic. This is where Limbach's strategy of focusing on growth in the ODR segment can offset higher costs. The ODR segment was responsible for 71% of the total gross profit and represented only 55% of the consolidated revenue in the fourth quarter of 2023. As a result, the growth of the ODR segment is expected to increase margins.
Labor shortages and employee retention have been another challenge lately. Limbach has strategies to minimize employee turnover and attract new employees. Limbach has a “we care” culture where the company strives to create a healthy work-life balance while offering a learning/development program along with a competitive salary and benefits package.
Limbach's strategy for growing its ODR business is to focus on its top five building owners. Each of these owners has several facilities, providing Limbach with a lot of business. Limbach will benefit from increasing margins as ODR is the most profitable segment. The company will also benefit by offering a high level of service to its customers, building strong relationships that will lead to new business in the future.
The company also has an acquisition strategy for additional growth. Limbach completed his acquisition of ACME industrial in 2023. ACME provided Limbach with several Fortune 500 clients and is a perfect fit for the ODR segment for mission-critical work.
Limbach also completed the acquisition of Industrial air in November 2023. This acquisition further expanded Limbach's presence in the rapidly growing North Carolina market with new ODR clients. Industrial Air is expected to achieve $30 million in revenue and $4 million in EBITDA annually.
Valuation
I'm using the EV/EBITDA ratio, which is a standard valuation metric for construction and engineering companies. I'm also using the price/sales ratio just to provide another perspective when valuing stocks based on earnings. This is how the shares accumulate:
| LMB | Matrix Services Company (MTRX) | Bowman Consulting Group Ltd. (BWMN) | Great Lakes Dredge and Dock (GLDD) | |
| EV/EBITDA forward | 8.4 | 278 | 10.2 | 9 |
| Forward price/sales | 0.84 | 0.41 | 1.2 | 0.70 |
Source: Seeking Alpha.
Limbach trades attractively below its competitors in terms of EV/EBITDA. Having an EV/EBITDA ratio below 10 is considered a healthy valuation level. Having a price/sales ratio less than one is also considered attractive.
I would like to point out that Matrix's high forward EV/EBITDA ratio is due to expectations that the company will return to profitability after a few unprofitable years. Therefore, the forward EV/EBITDA is skewed upward. Matrix is expected to return to profitability in FY25, which ends June 2025. However, we can see that Matrix is trading attractively with a low forward price-to-sales ratio.
Limbach stock has room to rise as its forward EV/EBITDA ratio is below 10 and below the sector's median forward EV/EBITDA of 11.4. LMB is expected to achieve 6% growth in EBITDA in 2024 with an increase of 13% in 2025. This growth could be the catalyst to drive the stock higher if estimates are met or exceeded.
Limbach's coverage analystsGerry Sweeney of Roth Capital Partners and Rob Brown of Lake Street Capital Markets, average one year $55 price target for the stock, which is 40% higher than the current price. The target can be achieved as Limbach continues to grow EBITDA, while the attractive valuation leaves room for further gains in the stock. If Limbach's EV/EBITDA were to increase to 10 times the expected 2024 EBITDA of $49.7 million, the price target would be $45 based on 10.95 million shares outstanding. Therefore, the analysts' price target of $55 implies that the EV/EBITDA ratio will rise to around 12, which still seems reasonable given the growth Limbach is expected to achieve.
Technical perspective
Limbach Holdings (LMB) Daily Stock Chart with RSI (TradingView)
The Limbach daily chart above shows the stock pulling back from its 52-week high of $52.96 and an overbought condition. The stock is at a support level in the range of $39 – $40. However, the stock could fall to the next support level at $35, which would likely push the stock into oversold territory based on the purple RSI line at the bottom of the chart. Of course, the stock could rise from here. Potential investors may want to consider dollar-cost averaging the stock in this current price decline.
An internal risk that could cause the stock price to decline further is the loss of business from one or more customers. Limbach focuses on a few large clients. Therefore, losing potential projects from one or more of these clients to competitors would likely negatively impact revenue and EBITDA. Another internal risk would be an increase in materials prices, which could reduce margins.
The main external risk that could cause further declines in the stock is a broad market correction or pullback. Another external risk could be a slowdown in the economy, leading to fewer new projects for Limbach.
Limbach's long-term investment prospects
Limbach has many positive trends to take advantage of in the MEP market. The expected double-digit annual growth for the MEP market should be a strong tailwind for Limbach. The company's focus on growing business in the higher-margin ODR segment is likely to drive strong EBITDA growth going forward. The valuation is attractive and offers great upside potential for the stock. As a result, I expect Limbach stock to rise at a strong pace over the next year.
