Limbach Holdings, Inc. (NASDAQ:LMB) currently looks intriguing as a potential investment due to the low valuation and strong expected growth in 2024. The stock’s recent dip in price looks like a good buying opportunity.
Limbach is a building systems solution company that provides mechanical, electrical, and plumbing [MEP] services. Limbach specializes in mission-critical solutions where the reliability of these systems is important. The company is involved in designing, installing, and maintaining MEP systems. These systems are installed in large buildings/facilities.
Limbach operates two segments: General Contractor Relationships [GCR] and Owner Direct Relationships [ODR]. The GCR segment comprises 49% of total revenue and includes contracts from construction managers or general contractors for new construction and renovation projects that involve MEP services. The ODR segment comprises 51% of total revenue and provides construction projects and/or MEP services directly to building owners or property managers.
Limbach’s Growth Drivers & Market Trends
Limbach faces a promising growing market over the next several years. The global MEP market is expected to grow at 11.5% annually to reach $192 billion by 2027. This should provide a significant, strong tailwind for Limbach.
One of the main trends for the MEP market in 2024 is the move to build or upgrade buildings for 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 all new buildings and 20% of existing buildings to be zero carbon ready by 2030. Of course, making HVAC and other systems more efficient can save building owners/operators money over the long term. Plus, there are government programs that provide incentives to businesses for energy-efficient improvements such as insulation, lighting, and HVAC systems. This can drive increased projects for Limbach over the next several years.
Another trend is to build or upgrade buildings with resiliency in mind. This is due to the high prevalence of severe weather 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 drive more projects for Limbach as companies strive to protect their facilities.
The use of AI (artificial intelligence) is another trend in the construction industry. AI is being used in this market to improve product design, for better cost controls, to optimize scheduling, and more. Limbach uses AI to help its clients track and better understand the performance of the assets of their facilities. This can help to reduce downtime and to be proactive regarding equipment repairs and replacements. It is also used to improve operational efficiency and energy use. These solutions can save money, which is a strong incentive for current customers to upgrade and to attract new potential customers.
One of the challenges in the market is that engineering & construction firms face cost volatility. This involves increased costs for labor and materials over the past few years. Key materials such as iron/steel and wood/lumber are still priced above pre-pandemic levels. Machinery and equipment costs increased 26% since before the COVID pandemic. This is where Limbach’s strategy to focus on growing the ODR segment can offset higher costs. The ODR segment was responsible for 71% of total gross profit while comprising just 55% of consolidated revenue in Q4 2023. Growing the ODR segment is expected to increase margins as a result.
Labor shortages and employee retention have been another challenge lately. Limbach has strategies in place to minimize employee turnover and to 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 pay and benefits package.
Limbach’s strategy to grow its ODR business is to focus on its top five building owners. These owners each have multiple facilities, which provides plenty of business for Limbach. Limbach will benefit from growing margins since ODR is the most profitable segment. The company will also benefit by providing a high level of service to its customers, which can build strong relationships, leading to new business in the future.
The company also has an acquisition strategy for add-on growth. Limbach completed its acquisition of ACME industrial in 2023. ACME provided Limbach with multiple Fortune 500 customers, and it fits right in with the ODR segment for mission-critical work.
Limbach also completed its acquisition of Industrial Air in November 2023. This acquisition further expanded Limbach’s footprint in the fast-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 & Engineering companies. I am also using the price/sales ratio just to provide another perspective by valuing the stocks based on revenue. Here’s how the stocks stack up:
LMB | Matrix Service Company (MTRX) | Bowman Consulting Group Ltd. (BWMN) | Great Lakes Dredge & Dock (GLDD) | |
Forward EV/EBITDA | 8.4 | 278 | 10.2 | 9 |
Forward Price/Sales | 0.84 | 0.41 | 1.2 | 0.70 |
Source: Seeking Alpha.
Limbach is trading attractively below its competitors on an EV/EBITDA basis. Having an EV/EBITDA ratio below 10 is considered a healthy valuation level. Having a price/sales ratio below one is also considered attractive.
I would like to point out that Matrix’s high forward EV/EBITDA ratio is due to expectations of the company returning to profitability after a few unprofitable years. So, the forward EV/EBITDA is skewed high. Matrix is expected to return to profitability in FY25, which ends in June 2025. However, we can see that Matrix is trading attractively with a low forward price/sales ratio.
Limbach’s stock has room to move higher, as its forward EV/EBITDA ratio is below 10 and below the sector median forward EV/EBITDA of 11.4. LMB is expected to achieve 6% growth in EBITDA in 2024 with a 13% increase in 2025. This growth could be the catalyst to drive the stock higher if the estimates are achieved or exceeded.
Limbach’s covering analysts, Gerry Sweeney from Roth Capital Partners and Rob Brown from Lake Street Capital Markets, have a one-year average price target of $55 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 stock gains. If Limbach’s EV/EBITDA were to increase to 10 multiplied by the expected EBITDA for 2024 of $49.7 million, the price target would be $45 based on 10.95 million shares outstanding. So, the analysts’ price target of $55 implies that the EV/EBITDA ratio will increase to about 12, which still looks reasonable given the growth that Limbach is expected to achieve.
Technical Perspective
Limbach’s 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 $39 – $40 range. However, the stock could drop to the next support level at $35, which would probably bring the stock down into oversold territory according to the purple RSI line at the bottom of the chart. Of course, the stock could go higher from here. Potential investors may want to consider dollar-cost-averaging into the stock on this current dip in price.
One internal risk that could lead to a further drop in the stock price is the loss of business from one or more customers. Limbach focuses on a few large customers. So, losing potential projects from one or more of these customers to competitors would likely negatively impact revenue and EBITDA. Another internal risk would be a spike in materials prices, which could narrow margins.
The main external risk that could lead to further declines in the stock is a broad market correction or pullback. Another external risk could be a slowdown in the economy, leading to less new projects for Limbach.
Limbach’s Long-Term Investment Outlook
Limbach has plenty of positive trends to capitalize on in the MEP market. The double-digit expected annual growth for the MEP market should provide a strong tailwind for Limbach. The company’s focus on increasing business in the higher margin ODR segment is likely to drive strong EBITDA growth going forward. The valuation is attractive and provides plenty of upside potential for the stock. As a result, I expect Limbach’s stock to increase at a strong pace over the next year.