Limbach Holdings (NASDAQ:LMB) is performing better than expected.

introduction

I only wrote two articles upon Rimbach Holdings Co., Ltd. (Nasdaq:Left click), but the stock has become one of Seeking Alpha’s most successful. Latest updatesLMB has risen 79% against the S&P 500 (SP500) (Spocks) Index 24.86%:

It’s been six months since we last looked at LMB, so today we wanted to update our article and revisit LMB’s future prospects – does the stock still have the potential for further growth?

Latest financial situation and trends

Limbach is a leading building systems solutions company specializing in mission-critical mechanical, electrical and plumbing services. The company designs, installs and maintains these systems in large buildings. IR DocumentsLimbach operates through two segments: General Contractor Relations (GCR) and Owner Direct. In Relationships (ODR), GCR (construction and renovation projects with MEP services) accounted for 37.6% of total sales in the first quarter, with ODR providing construction projects directly to building owners or property managers.

1st Quarter 2024The company’s ODR division recorded a strong 26.46% year-over-year revenue increase, contributing $74.3 million, or 62.4% of consolidated revenue and 71.3% of total gross profit. Although total revenue was slightly down to $119 million, higher margins in the ODR division helped total gross profit increase 18.5% to $31.1 million.

In general, LMB is undergoing a strategic shift from GCR to ODR to increase the profitability of its consolidated business over the long term, which likely explains the decline in ODR revenue (and consolidated total revenue) in the first quarter. Management explained the move as follows: During a recent earnings announcement:

Revenues were down slightly, but this was the result of a deliberate strategy to scale back GCR business and shift to ODR, improving margins.

Despite declining sales, we see this strategic shift paying off: consolidated gross margins are growing rapidly (26.1% in Q1FY24 from 21.7% last year) and strong operating leverage has helped EBIT grow 40.4% year-over-year, with corresponding margins expanding from 3.85% last year to approximately 5.5% in the most recently reported quarter.

First-quarter net income increased even more, increasing 153.5% to $7.6 million, or $0.64 per diluted share, which was more than adequate. win Despite the missing top line, the consensus estimates are as follows:

From my perspective, the focus on ODR has worked so far (note the improved margins and profitability across the board). Additionally, Limbach’s balance sheet remains strong, with $48.2 million in cash and cash equivalents and a current ratio of approximately 1.60 (above the generally accepted ratio of 1). Management plans to continue investing in the ODR segment and “leverage our strong financial position and disciplined operating practices to drive additional growth and value for shareholders.” Based on these plans, we should see a continuation of existing trends around leverage and profitability shortly.

Also of note, Limbach has increased its fiscal 2024 Adjusted EBITDA guidance to a range of $51 million to $55 million (up 3.9% compared to the midpoint), reflecting confidence in its strategic shift towards higher-margin ODR business.

What I like about LMB’s approach is the transparency of its business processes. Management has set clear goals for the near future and is taking strategic steps that are easy to follow. For example, the latest IR presentation indicates that LMB wants to generate 80% of its sales from ODR from fiscal year 2024 onwards. What are they doing to achieve this? In addition to what we have explained above, Limbach is actively acquiring other companies to expand its ODR. In fiscal year 2023, Limbach acquired two companies for a total of $15.3 million: an industrial company in Tennessee ($5 million) and an engineering company in North Carolina ($13.5 million). Both companies will be managed in the ODR segment, further increasing LMB’s presence in the United States.

In my view, LMB is growing and evolving in the right direction. By tightly managing liquidity and cash on the balance sheet, the company is transitioning smoothly into higher margin and financially stable sectors, which I believe will lead to multiple expansion. But what is the fair price for LMB?

Rimbach stock valuation update

Let’s do the math together. Assuming that Limbach receives 80% of all revenue from ODR from 2024 onwards and that the margin of this segment remains at 28.9% (average of the four quarters of 2023), gross profit for the whole of FY24 would be about $149 million (if the revenue consensus of $505 million is close to reality). Assuming that EBITDA/GP remains at the current level of 34.3% this year, EBITDA should be $51.1 million (up 20% year-over-year). This is within management’s guidance range, but it is not an adjusted figure. In other words, adjusted EBITDA should be even higher if we adjust for individual items. Instead, net income should be significantly higher, taking into account existing operating leverage and the reduction in interest expense. Analyst forecasts That’s “much higher” EPS growth than we just calculated.

We expect LMB’s FY24 EPS to rise 15% as the company continues to beat expectations for the reasons mentioned above. With expected EPS of $2.61, the P/E ratio is 20.7x, but we believe a) margins are rising and are expected to continue to increase in the near future, and b) Sector median is slightly highernevertheless LMB growth rate It’s several times higher than average.

Assuming LMB maintains its current P/E ratio of 23.8 through the end of the year, the stock will trade around $62, giving me an expected EPS of $2.61. The “fair price” I’ve arrived at is 15% above today’s market price, so I’ll make this my target price.

Risks to consider

I am taking a risk today by reiterating my “Buy” rating on LMB.

beginningIt’s hard to say exactly where the company’s gross margin ceiling is – it’s likely already approaching it, which would make it extremely difficult for LMB to continue to demonstrate margin expansion, which may explain the increased valuation premium.

Number 2The Company’s business is highly cyclical and a downturn in the U.S. economy could have a significant impact on Limbach’s business.

The thirdthe multiples I consider reasonable seem quite high, especially the current price-to-earnings ratio of 23.8x. The company could also fall short of current EPS estimates, which would likely lead to selling as the valuation already looks quite expensive.

the 4thTechnical analysis indicates that there is a risk of a correction as LMB has recently failed to gain ground above $59-60/share. Any mean reversion towards the 200-day moving average (which coincides with the medium-term trend level) could see a 15% correction from current levels.

Conclusion

Despite all the risks, I try to look at Limbach from a fact-based and fundamental standpoint.

• The company continues to grow EBITDA and EPS by focusing on higher margin businesses.
• Management has raised its adjusted EBITDA guidance, which could indicate that margins are growing at an even faster pace than previously assumed.
• LMB is aggressively expanding across the U.S. and is quickly approaching its goal of deriving 80% of its revenue from ODR.

Based on my analysis of future EBITDA and EPS, I believe LMB remains an undervalued company, with upside potential of 15% in my opinion, but potentially even higher if management’s strategic plan is executed faster than I expect.

Therefore, I maintain my “Buy” rating on LMB today.

thank you for reading!