Emcor CEO Richard MacInnis Is No Empire Builder

In July I posted about an interview with Emcor's (EME) CEO Richard MacInnis. My thesis was that MacInnis is disciplined, focused and not an empire builder. Today comes news that EME is purchasing Ohmstede for $455 million in cash to expand its services to energy and petrochemical markets.

Does this validate or refute my opinion of MacInnis?

Emcor can borrow money at pre-tax at roughly 7.5-8.5% (12/31/06 10-K, pg. 26). The company has ample room to expand its borrowing, and even enjoys a small positive carry trade because of its extensive cross border operations (note: EME is NOT a hedge fund in the form of a mechanical contractor. Positive carry is the intentional outcome of cross-border operations, which are a way to hedge currency risk). By EME's estimation, the deal will add $280 million in revenue and $.10/share to net income, after 2007.

Net income is estimated to be $1.55/common share in 2007, so by the company's estimation this will provide about a 6.5% lift to net income based on 2007 numbers.

Wall Street likes the news, sending shares up 10% as I write this. A 6.4% jump in net income resulting in a 10% share price increase sounds like bad math to me. Some of the excess could be from the short covering still unwinding. Since Ohmstede is privately held, there isn't much beyond EME's public statements to chew on (the seller is First Reserve, a well regarded private equity firm).

A 6.4% increase in net income for a low margin business is no easy feat and I'm guessing that the acquisition has a strategic as well as financial benefit for EME, as it's not a voracious acquirer. For now, I'm prepared to say that this doesn't strike me as the act of an empire builder, so my opinion of MacInnis is unchanged.

EME 1-yr chart: