Limbach Holdings: The Story Just Got Better (NASDAQ:LMB)

Limbach Holdings (NASDAQ:LMB) has been the biggest winner of those we’ve profiled here on Seeking Alpha over the past year. I felt it prudent to revise my thesis a year later my cover and see if the story is valid.

Recap of my last coverage

We thought Limbach was a compelling investment opportunity because it was a hidden gem in the industrials sector 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 have to to a certain extent).

Limbach Holdings specializes in critical mechanical, plumbing and electrical services for the maintenance of critical systems. Despite being in a less “hot” industry, the company has shown remarkable resilience and growth, reaching a 344% return in a year.

Generally there there is some hesitation to pull the trigger if a stock has risen so much in a year.

However, I have always been of the opinion that a stock’s past returns should not dictate the thesis and only provide a narrative, not an argument for investing or disinvesting.

The company’s ability to tighten its belt during periods of revenue slowdown, improve gross margins and maintain a healthy balance sheet demonstrated a strong operating strategy. Its strong cash position, low debt, valuation, heavy insider buying and improving key financials such as ROE, ROA and ROIC were all factors that contributed to my ‘Buy’ rating.

Attention since my last coverage

Limbach was of course not a perfect company and we left the door open for future areas of uncertainty. My concerns revolved around the following.

• Good job on cost efficiency so far, but may face limits on additional savings and a saturated market.
• Future growth will likely be based on strategic acquisitions and expansion into new areas, and these opportunities are hard to come by
• Potential declines in new construction could affect future revenues

A year since then

Limbach’s margins continued to trend upwards and at record highs

Margins for Limbach Holdings grew more than I expected, and the company’s strategy to focus more on higher-margin ODR businesses paid off, leading to record gross margins. In addition, effective cost management and operational efficiency contributed to improved operating margins.

Recent performance: For the quarter ended Q2 2024, gross margin was 27.4%, which is a significant increase from 22.8% in Q2 2023. Gross margin for TTM was 25.24%. Operating margin was 7.61%, up from 6.18% in Q2 2023. Operating margin for TTM was 7.03%

The Owner-Direct Relationships (ODR) segment was a major contributor to the high gross margins, with the ODR gross profit margin expanding to 30.6% in Q2 2024 from 29.3% in Q2 2023. The General Contractor Relationships (GCR) segment a also reported an increase in gross margin to 20.6% in Q2 2024 from 17.1% in Q2 2023

Geographic expansion and integrated acquisitions strengthen market share and footprint

In line with strengthening its higher margin ODR business, Limbach Company has targeted acquisitions that help achieve this goal. In the past year, the company has acquired ACME Industrial, Industrial Air (IA) and Ken Island Mechanical. The company is selective and opportunistic in evaluating these opportunities to find the right strategic fit, and I see some positives from these acquisitions.

1. Limbach is diversifying its service offerings by acquiring companies with specialized capabilities (such as KIM emergency solutions and AI specialist contracting). This diversification can help insulate the company from market fluctuations in any service area.

2. The acquisitions demonstrate Limbach’s focus on expanding its geographic footprint, particularly in the eastern United States (KIM has a presence in the DC metro area, IA in the Carolinas)

3. These acquisitions suggest that 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 operating cash flows (more cash than total debt, debt-to-equity ratio down from 88% to 7.2%).

It reminds me of flywheel approach that we have seen in other successful serial buyers. The elements of the flywheel support and reinforce each other, and I hope that this concept will be successfully realized at Limbach.

Potential declines in new construction (risk)

So the company has managed to mitigate 2 out of 3 areas of uncertainty for me, but one still remains, which is the outlook for the construction industry. As the expected long-term recession passes it may finally make its presence felt, and while Limbach may not have to shoulder the full impact (its presence in critical systems shields it from the worst macroeconomic trends), it could still be visible enough that it gets a hit to the top line.

As such, there are some indicators in the economy that we may be taking a bad turn.

According to the US Census Bureau, construction spending in July 2024 showed signs of slowing:

• Total construction spending was estimated at a seasonally adjusted annual rate of $2.162 billion, i.e. 0.3% below the revised June estimate of $2.169 billion.
• Private spending in construction fell by 0.4% compared to the previous month, with both the residential and non-residential sectors recording declines

Limbach’s assessment represents an optimistic future

Part of the reason for my Buy rating last time was that I thought the valuation was compelling given the improvement in profitability. However, what I see now is that the market is rewarding this a bit excessively, with price going ahead of valuation.

It trades at an earnings multiple of 28.3x and across all of its valuations ranks near its highest (below percentile ranking shows that in most cases valuations were above 90 % lower than they are now)

But on the other hand, that can be well argued because its margins and profitability are at the highest levels compared to its own history (the below percentile ranking shows that in most cases the values ​​were lower than they are now)

I think the market pays a premium for the quality of the company’s operations. The market seems to value the company’s strong profitability, strategic shift to higher margin businesses, solid financial health and promising growth prospects.

Could the premium valuation also reflect investor confidence in Limbach’s ability to deliver consistent results across business cycles and capitalize on its market opportunities?

There are some hints from its latest Q2 2024 earnings call and it looks like the company has momentum on its side –

As we continue to accelerate the pace of business transition, we are increasing our total revenue and adjusted EBITDA guidance ranges for the full year 2024. Full year adjusted EBITDA is now expected to be in the range of $55 million to $58 million. million, which is up from our previous guidance of $51 million to $55 million that we presented in Q1. And ours full-year total revenue guidance range is now $515 million to $535 million, up from $510 million to $530 millionwhich is our previous range.

– Michael McCann, President and CEO

Reiterating my Purchase

I think the stock continues to be a Buy. In the short term, we may see some rotation as the stock market seems to be on a shaky footing as of now, which could affect Limbach stock. However, investors who believe in long-term prospects would benefit from its growth strategy and operational efficiency, which could make it a long-term compound.