Limbach - The Turnaround Is Gaining Momentum

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About: Limbach Holdings, Inc. (LMB)
by: The Calculated Investor
Summary

2019 First quarter financial results confirmed that the company has turned the corner and is back to being profitable and growing revenues at an 11% clip.

The company reported that the challenges with operations in the Mid-Atlantic region have been resolved and operational as well as financial performances are improving.

The CEO bought shares beginning of the year showing confidence in the company and it’s future.

Based on the confirmation of the turnaround and the potential 200%-300% stock price appreciation potential over the next 12 months, the recent dip in LMB’s price may be a good entry point.

Investment Thesis

While searching for undervalued stocks, Limbach Holdings (NASDAQ:LMB) kept popping up. After researching the company, I believe that the business turned the corner and the stock price may have wide appreciation potential.

If you look back over the last couple of years, it is noticeable how similar the financial reporting theme is: Limbach EPS misses, beats on revenue. This trend seems to be mostly because of poor management and specifically taking on more work than the company resources could successfully execute. Over the last couple of quarters, though, the business seems to be turning around: Q4 2018 - Limbach beats by $0.27, beats on revenue; Q1 2019 - Limbach beats by $0.29, beats on revenue.

Digging deeper into the business model and financials, there appears to be potential, especially with the company’s maintenance services that provide post-construction, longer term recurring revenue at a higher profit margin.

Company Profile

Founded in 1901 as a one-man roofing and sheet metal operation, Limbach Holdings (LMB) is now a national, commercial specialty contractor focusing on HVAC, plumbing, electrical and building controls for the design and construction of new and renovated buildings. The company also provides maintenance services, energy retrofits and equipment upgrades. Over the last 118 years, Limbach has grown to be the 9th largest mechanical systems solutions firm in the United States as determined by the 2018 Engineering News Record.

Some of company’s recent big projects, highlighted on their website include the following:

  • Furnish and installation of a new HVAC system at the Boston Medical Center;

  • Mechanical, electrical, and plumbing (NYSE:MEP) services for the new D.C. United soccer stadium;

  • Design/build services for HVAC, plumbing, and temperature controls for the Beaumont Royal Oak New Emergency Center;

  • Mechanical and plumbing services for the expansion of the Botsford Hospital;

  • Mechanical services for the Cambridge Crossing science and technology building;

  • HVAC piping, plumbing and medical gas services for the expansion of the Children's Hospital of Philadelphia;

  • HVAC, plumbing, piping, and controls services for the new McLaren Port Huron South Tower healthcare facility;

  • Building management, controls, electrical, engineering, HVAC, sheet metal replace air handling units and control systems at the Mount Carmel St. Ann's hospital;

  • Mechanical, plumbing & controls services for the ProMedica Toledo Hospital;

  • Mechanical services for a new six-story building with 192 apartments and 2,000 sf of retail space;

  • Mechanical, plumbing, engineering, and controls services for the Ohio State University Hospital;

  • HVAC and plumbing services for the new Wayne State University Anthony Student Housing facility.

As the list indicates, most of the work is generated in the healthcare and educational industries which have favorable construction outlooks based on the FMI U.S. Construction Outlook Fourth Quarter 2018 Report.

One of the company’s key business initiatives, launched in 2013, includes post-construction service and maintenance agreements that improves MEP uptime and reliability as well as optimize system operating and energy efficiency.

Financials

The following table summarizes revenues and gross profit for the company since they came public in 2014.

Year

Total Revenues

Service Revenue

Service Revenue Ratio

Gross Profit

2014

$ 294

$ 50

17%

$ 39

2015

$ 331

$ 58

17%

$ 45

2016

$ 447

$ 82

18%

$ 56

2017

$ 486

$ 94

19%

$ 66

2018

$ 547

$ 108

20%

$ 59

For 2018, the company incurred $16 million in net write-downs. This was mainly a result of too much work and insufficient resources, specifically in the Mid-Atlantic region, that caused delays and quality issues. Management has since resolved these issues and are confident that the Mid-Atlantic region will once again be one of the company’s major revenue and profit contributors. Management reported that they will be taking "baby steps before running" to make sure that the region is "laser focused" on profitability. For the 1st quarter of 2019, the region actually delivered a profit that exceeded their forecast.

Notice from the summary table that service revenue as a percentage of total revenue is growing and the company stated that their goal is to have this ratio at 70% Construction and 30% Services within the next 3 years. The service business tends to be recurring with customer relationships lasting more than 8 years on average.

The financial results for the 4th quarter of 2018 showed that the business is back on track with year-on-year revenue growth of 15.2% and earnings per share of $0.44 compared to $0.12 in Q4 2017. This was corroborated by the recent Q1 2019 results with revenues increasing 11.1% and earnings of $0.28 vs. $(0.6) year-over-year. The first quarter is seasonally the slowest reporting period, so these results bode well for the rest of the year.

Sales during Q4 2018 were strong, providing a backlog of $559.7 million, and an additional $380 million of so-called promised work. $54.2 million of the backlog is service work. The company stated that the backlog provides approximately 60% of the 2019 construction revenue budget. At the end of the 2019 first quarter, the backlog has ballooned to $611.4M.

For 2019, management is focusing on controlling growth and maximizing gross profit margins to 15-16% compared to 13% in Q4 2018. Again, the company is off to a solid start, with reported gross profit margin of 15% in Q1 2019.

One of my concerns is the high debt level. The company reported on April 12, 2019 that they secured new financing structured as follows:

  • $65 million senior secured credit facility with a 3 year maturity and interest rate of LIBOR plus 800 basis points.

  • $15 million senior secured asset based lending revolving credit facility with a 3 year maturity and interest rate of LIBOR plus an availability-based margin of 300-350 basis points.

The refinancing agreement also issued 5 year term warrants to lenders to purchase up to 263,314 shares of the company’s common stock at an exercise price of $7.63 per share.

During Q1 2019, Limbach generated $5.6M in adjusted EBITDA that easily covers the debt interest expense of almost $0.8M (current ratio of about 1.25 for Q1 2019 vs. 1.13 for Q4 2018) so they should be able to stay cash flow positive if business continues like the first quarter for the rest of the year.

Target Price

Other Seeking Alpha contributors, Jeremy Blum and Dane Capital Management, as well as member, Zerosumgame333, developed detailed valuations for LMB that range from a share price of $18 to $30 within the next 12 months. This range provides potential upside of almost 200% - 300% at a current stock price in the $8s.

Jeremy's valuation assumes a 3% profit margin and revenue for FY19 of $540M should generate diluted EPS of $2.11. With a PE of 12, it translates to a stock price of about $25.

Dane Capital Management forecasts EBITDA of $39.5M in 2019 based on management executing on their turnaround plan and if so, should result in a stock price of around $30 in 12 months' time.

ZeroSumGame33 expects FY19 EBITDA of about $23M and free cash flow similar to 2018 FCF of $21.5M. Based on their financial analysis, they expect LMB to double or triple over the short term.

Based on the Q1 2019 results, I am convinced that the company has turned the corner and the stock quote can keep appreciating to the forecasted price range. The CEO, Mr. Bacon, seems to agree and purchased shares during the first quarter of 2019 that to me provides a further vote of confidence. The recent stock price pull back from around $9 to the low $8s, provided a good entry point and that’s when I pulled the trigger.

Disclosure: I am/we are long LMB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.