Serve and Construct

In today’s fast-paced world, the Construction and Engineering sector within the Industrial Sector represents a key area of growth and development. Companies in this industry are crucial, often quietly working behind the scenes to build and maintain the systems and structures that power our daily lives. Specializing in areas such as electrical and mechanical construction, energy solutions, and facilities services, these firms are integral to the development and upkeep of vital infrastructure.

The importance of this industry lies in its breadth. These companies do more than just build; they ensure the operation and efficiency of critical systems across a range of environments – from commercial buildings to plants to government facilities. Their services, which extend to fire protection, HVAC, and communication systems, among others, are essential for the smooth functioning of numerous sectors.

From an investment perspective, this industry is characterized by its steady growth and resilience. Firms in this sector typically showcase diverse service portfolios and solid financial foundations, often leading to consistent performance and growth potential. Their strategic expansions and continuous adaptation to market changes make them particularly noteworthy for investors.

We will present such a company, but first, let us delve into a short update on the economy and markets, and the Smart Investor calendar.


Economy and Markets: Looking Forward

There are several important reports scheduled to be published in the next few days.

  • Later today, we’ll see two major manufacturing reports published: October’s S&P Global Manufacturing PMI and ISM Manufacturing PMI. These reports measure business conditions in the manufacturing sector, one of the two main sectors of the U.S. economy, which directly affects economic growth. PMI indices are leading economic indicators used by economists and analysts to gain timely insights into changing economic conditions, since the direction and rate of change in the PMIs usually precede changes in the overall economy.
  • On Friday, the U.S. Bureau of Labor Statistics will release the reports on October’s Nonfarm Payrolls and Unemployment Rate. These reports present the number of new jobs created during the previous month, and the percentage of people that were actively seeking employment in the previous month. These reports are considered two of the most important economic indicators, as policymakers follow the shift in the number of positions since it is strongly associated with the health of the economy as a whole. One of the mandates of the Federal Reserve is full employment, and it takes labor market changes into account when determining its policy decisions, which influence the capital markets.


As for the stock calendar, the Q3 2023 earnings season for Smart Investor Portfolio companies is in full swing, with many earnings reports scheduled for the next several days. The reporting companies this week are Wesco International (WCC), Alamo Group (ALG), Cigna (CI), ITT Corp. (ITT), Parker Hannifin (PH), Vertex Pharmaceuticals (VRTX), Crane NXT (CXT), and Air Products and Chemicals (APD).


The ex-dividend date for Lamb Weston Holdings (LW) is November 2nd.


Today, we are adding the stock of one of the leading U.S. construction and engineering services providers, whose solutions underpin a myriad of plants, data centers, office buildings, transportation hubs, oil rigs, and more.

To make room for this valuable addition, we are letting go of a robust and profitable company, whose over-optimism didn’t go down well with the negative sentiment-ridden markets.


New Addition: EMCOR Group (EME)

EMCOR Group, Inc. provides electrical and mechanical construction and facilities services primarily in the United States and the United Kingdom. It offers design, integration, installation, start-up, operation, and maintenance services related to electrical systems, energy solutions, process instrumentation in the refining, chemical processing, and food processing industries, fire protection solutions, security and process control systems, voice and data communications systems, roadway lighting, signaling, and fiber optic lines, heating, ventilation, air conditioning, refrigeration, and geothermal solutions, ventilation systems, central plant heating and cooling systems, crane and rigging services, and more. The company also provides building services that cover commercial and government site-based operations and maintenance, facility management, outage services to utilities and industrial plants, military base operations support services, indoor air quality services, installation and support for building systems, etc. The company is headquartered in Norwalk, Connecticut.

EMCOR is one of the most diversified companies in the Construction and Engineering industry of the Industrial Sector. It operates via three major service divisions, each with specialized knowledge and expertise: EMCOR Construction Services (ECS), EMCOR Building Services (EBS), and EMCOR Industrial Services (EIS).

  • The ECS division, through 65 subsidiaries across the U.S., focuses on three core competencies: Electrical Construction (from renovations, retrofits, and installation to single-source design-build solutions), Mechanical Construction (from small capital improvements to plant expansions to end-to-end new facility construction), and Security and Protection (fire and life safety systems for high-security, data center, nuclear, biopharmaceutical, heavy industrial markets, and others).
  • The EBS division, through its 46 U.S. subsidiaries, engages in numerous building-related activities, ranging from mechanical construction and site-based facility management services to energy efficiency and interior/exterior maintenance. It works through four segments: Mechanical Services, which plans, installs, and maintains cutting-edge mechanical systems for any requirements; Commercial Facilities, which provides facilities management, service, and maintenance; Government Facilities, one of the leading integrated facility services providers for government agencies, military installations, federal buildings, healthcare facilities, and commercial enterprises; and Energy Services, which develops customized energy solutions to create and maintain high-performance environments while reducing energy use and operating costs.
  • The EIS division, through its 10 subsidiary companies, performs site services for industrial maintenance and construction projects, as well as off-site manufacturing, fabrication, cleaning, and repair of industrial process equipment. The division serves the manufacturing, food and beverage, oil and gas, alternative energy, mining, IT, transportation, utilities, and other industries.
  • In addition, the U.K. arm of U.S.-based EMCOR Group, EMCOR U.K., builds, installs, and maintains mechanical and electrical systems, delivering high-performance, sustainable facilities management, asset services, and strategic workplace solutions. EMCOR U.K. serves life sciences, defense, nuclear, hi-tech manufacturing, and other industries, as well as central and local government institutions.

The company was established in 1995, as a result of the reorganization of JWP, Inc. following its emergence from bankruptcy. JWP was a water supply company, founded in 1966, which expanded and diversified into construction and engineering but eventually was toppled by its extensive debt load. Since its restructuring and rebranding, EMCOR has been focusing on key business segments related to its electrical and mechanical construction activities and has established itself as one of the leading construction and industrial services companies in the U.S.

Today, EMCOR is a Fortune 500 company, commanding a market capitalization of $9.7 billion, annual 2022 revenues of $11.1 billion, and a workforce of over 33,000 employees in 80+ operating companies in more than 180 locations in the U.S. and the U.K.

Through the years, it has grown through numerous acquisitions, expanding its service suite and geographical reach. The group’s most notable recent acquisitions include ECM Holding Group, Inc., a leading national energy efficiency specialty services firm, in 2023; Gaston Electrical Co., a leading full-service electrical construction contractor, in 2022; and QUEBE Holdings, a leading electrical services company providing preconstruction, construction, systems integration, and energy solutions, in 2021.

Despite its cash acquisitions, EMCOR Group’s financial health is more than stellar. Its debt-to-equity ratio is under 5%, meaning that the company has virtually no debt. Its cash and short-term investments are fivefold its total debt. Besides, its quick ratio of 1.2 and its current ratio of 1.3 indicate a healthy level of liquidity.

As for capital efficiency, EME features industry-beating metrics. Its Return on Equity (ROE) of 26.6% and Return on Assets (ROA) of 9% are much higher than the industry’s averages. EMCOR’s strong profitability is reflected in its gross margin of 16%, operating margin of 6.3%, and net profit margin of 4.5%. These margins may seem mediocre at first glance; however, they are much higher than the averages in the construction & engineering industries.

In the past three years, EMCOR has grown its revenue at an annual pace of 11%, while its earnings grew by 13.7% a year, an exceptional performance for its typically low-growth industry. On October 26, EME released its Q3 2023 results, reporting EPS and revenues which by far exceeded analyst expectations. In fact, the group has beat analysts’ EPS estimates in all quarters when these estimates were available, with a single exception in Q2 2022.

In Q3, EMCOR reported record quarterly revenues, which increased 13.5% year-on-year, as well as record EPS, which surged over 67% year-on-year. The company said that these results were mainly driven by double-digit growth in its Construction Services and Building Services divisions in the U.S., as despite ongoing geopolitical tensions and tightened financing conditions, the company saw very strong end-market demand for its services. In addition, EMCOR said it continues to profit from high demand for its services in projects supporting the onshoring of the supply chain and domestic capacity expansion. As a result, the company’s management lifted its full-year 2023 guidance for EPS by about 14%, also penciling in higher-than-previously-expected revenues.

EMCOR Group’s stock has been trading on the NYSE since 1996 under the ticker “EME”; the company is a member of the S&P MidCap 400 stock market index. In the past three years, the stock has delivered a gain of 202%, versus the mid-cap index’s increase of 24% in the same period. In the past 12 months, EME has gained 46%, while S&P 400 has lost 3%. As a result of the stock’s stellar run, the company’s market cap has almost doubled in the past three years, putting it on the verge of becoming a large-cap company.

The company’s stock reached its all-time high on September 1, after which it declined on profit-taking and general market turbulence. However, the release of outstanding quarterly results has propelled the stock back up. Despite the outperformance, EME remains modestly valued compared to its peers in the industry. It is now trading at a TTM P/E of 17.9 and a Forward P/E of 16.5, representing an 18% discount to the Industrial sector’s averages.

Despite its substantial size, extensive reach and diversification, robust finances, and great stock performance, EMCOR Group’s stock has largely flown under Wall Street’s radar. In the past months, the only analysis of the stock was provided by D.A. Davidson, which rated the stock a “Buy” without attributing a price target.

Meanwhile, hedge funds and individual investors are very positive towards the stock, steadily increasing their exposure. EME carries a “Perfect 10” Smart Score rating on TipRanks with a “Moderate Buy” recommendation:

In addition to stock gains, EMCOR compensates its shareholders through buybacks and dividends. The company has a share repurchase program running since 2011, under which the company buys back its stock on an opportunistic basis. In the first nine months of 2023, EME repurchased shares for the amount of over $105 million, after it bought back its shares for $657 million in the same period of last year.

EME has been paying and steadily increasing dividends for the last 11 years. Its current dividend yield of 0.32% is very low and serves to convey the company’s stability and alignment with shareholder interests, more than to provide meaningful income. However, given the company’s strong finances and robust growth, it can be expected to increase its cash payouts in the future. In addition, research shows that stocks of companies that consistently grow their dividends outperform their non-dividend-paying peers over the long term.

Given all said above, we view EMCOR Group’s stock as a winning combination of quality and growth, and as such, a valuable addition to the Smart Investor portfolio.


New Deletion: Alamo Group (ALG)

Alamo Group designs, manufactures, distributes, and services vegetation management and infrastructure maintenance equipment for governmental, industrial, and agricultural uses worldwide. Alamo’s products include truck and tractor-mounted mowing and other vegetation maintenance equipment, street sweepers, snow removal equipment, excavators, vacuum trucks, other industrial equipment, agricultural implements, and related after-market parts and services.

Alamo is a financially sound company with a low net debt-to-equity ratio, robust capital efficiency metrics, and above-average margins. When we recommended it back in May, it was rated a “Strong Buy” by many analysts, applauding its outstanding financial results in the first quarter of 2023, and optimistic outlook. The company’s stock surged to an all-time high in July, propelling ALG’s market cap from $2.0 billion at the purchase date to $2.4 billion.

However, the management’s optimistic projections didn’t play out well. In Q2, the company missed analysts’ EPS projections, and its stock was severely punished. ALG stock was already declining, a natural fall from an all-time high on profit-taking; the EPS miss gave it a strong push downwards. Besides, the stock markets in general turned for the worse at about the same time, and the negative sentiment massively contributed to ALG’s underperformance. As a result, the stock has fallen almost 20% from its high, and the company has lost its mid-cap status, dropping to a $1.9 market capitalization.

Alamo retains its intrinsic value as a robust and profitable company; analysts haven’t been in a rush to downgrade it (although, as a small stock, it is not very well-covered). However, in the current uncertain economy, scary geopolitics, and nervous markets, negative surprises for investors may be lurking around every corner – and small-cap companies are especially heavily impacted by market volatility. Thus, we believe it is appropriate to sell the stock.


Charter Members of the 30% Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

Despite the overall negativity in the markets in the past week, one stock has managed to pass the threshold for entrance into our exclusive club. Now, the Winners Club includes three stocks: the long-standing champions GE and AVGO, and the re-entering ANET with a 32.3% gain since purchase.

The stocks that fell through the threshold last week – TECK, ORCL, and CDW – have risen since, but not enough to return to the ranks. Now, these “fallen angels” are the first in line to reenter the Winners Club. Will they be able to close the gap, or will someone else outrun them to the finish line?


What’s Next?

Our next commentary will come out on Wednesday, November 8th, before the market opens.

Until then – we wish you a world of investment success!

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Portfolio Changes

New Portfolio Additions

Ticker Date Added Current Price
EME Nov 1, 23 $206.65

New Portfolio Deletions

Ticker Date Added Current Price % Change
ALG May 24, 23 $160.30 -8.49%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
GE Jul 27, 22 $108.63 +94.40%
AVGO Mar 22, 23 $841.37 +33.36%
ANET Jun 21, 23 $200.37 +32.25%
TECK Dec 8, 21 $35.34 +27.03%
ORCL Dec 21, 22 $103.40 +26.87%
CDW Jun 29, 22 $200.40 +26.77%
GD Dec 22, 21 $241.31 +18.43%
CI Jul 12, 23 $309.20 +15.08%
JBL Jul 5, 23 $122.80 +12.46%
MOH May 3, 23 $332.95 +11.16%
UNH Apr 19, 23 $535.56 +10.15%
EG Oct 4, 23 $395.62 +6.01%
CHKP Jul 19, 23 $134.25 +5.44%
VRTX Aug 2, 23 $362.11 +4.13%
STLA Sep 6, 23 $18.68 +2.86%
CXT Oct 25, 23 $52.00 +0.46%
AMAT May 31, 23 $132.35 -0.71%
APD Apr 26, 23 $282.44 -1.13%
ITT Oct 18, 23 $93.35 -2.26%
ACN Aug 16, 23 $297.09 -3.43%
ADM May 10, 23 $71.57 -4.11%
WCC Sep 14, 22 $128.20 -4.44%
PH Oct 11, 23 $368.91 -7.26%
TSM Aug 23, 23 $86.31 -7.98%
APH Aug 9, 23 $80.55 -8.92%
EPD Jan 15, 20 $26.04 -9.96%
TDY Aug 30, 23 $374.59 -10.00%
STM Sep 13, 23 $37.98 -14.01%
LW Apr 13, 23 $89.80 -16.98%
PERI May 17, 23 $25.40 -18.75%
ACLS Sep 27, 23 $127.50 -18.83%
TEX Sep 20, 23 $45.80 -21.47%
DE:IFX Apr 5, 23 $27.61 -22.20%



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