The Thesis

Moving into 2024, Limbach Holdings (NASDAQ:LMB) continues to experience topline weakness due to significant revenue loss in the company’s General Contractor Relationships (GCR) segment as a result of its mix-shift strategy. I expect this weakness to continue further in 2024, as the company is targeting its Owner Direct Relationships (ODR) revenue share to reach at least 70% in 2024, which is currently near 62%, to drive EBITDA growth in the coming quarters. However, the contribution from the recent acquisition should support the company’s topline by partially offsetting the impact of expected revenue loss.

While the short-term revenue outlook appears to be weak, the company continues to look for potential M&As to grow its market share, which along with additional and evolved offerings by LMB should benefit its topline in the longer term. Considering the growth prospects, the company’s valuation looks decent at the current levels, making it a good buy for the long term.

Last Quarter Performance

The topline growth for the company moderated in the latter half of 2023, which continued further as the company entered into 2024. During the first quarter of 2024, the company’s revenue declined approximately 1.68% year-on-year to $119 million as the company continued to scale down its GCR business to increase the share of its ODR business in the total revenue due to margin benefits. During the quarter, the GCR revenue was down 28.2% against 26.5% growth in the ODR business supported by contributions from two recent acquisitions, leading to the revenue of the ODR segment now comprising 62.4% of the revenue.

While the topline growth remains under pressure, the company margin continued its robust growth as the company’s adjusted EBITDA margin 270 bps year-on-year to 9.9% during the first quarter of 2024. This was primarily a result of the company’s mix-shift strategy as approximately 70% of the profit dollar was contributed by the ODR segment during the quarter. However, the strong margin in the ODR segment was partially offset by the impact of higher SG&A as a percentage of sales and reduced margin in the GCR segment.

Strong EBITDA growth also benefited the company’s bottom line during the quarter as the company’s EPS more than doubled to $0.64 from just $0.27 in the prior year’s quarter beating the consensus estimates by $0.30.

Outlook

As we discussed above, the decline in the company’s topline continued as the company entered into 2024 primarily due to the company’s intentional attempt to bring down GCR’s share in the company’s total revenue. While the company has successfully pulled the ODR revenue share over 60%, I expect the company’s topline to continue to be under pressure as the company is targeting ODR revenue share to climb up to 70% in 2024. However, apart from scaling down GCR, the company’s mix-shift strategy should benefit from contributions from two recent acquisitions in 2023. One of the acquisitions was ACME Industrial, which is expected to contribute about $10 million in revenue with an EBITDA over $1 million for FY24. On the other hand, another acquisition, Industrial Air is expected to contribute approximately an average of $30 million in revenue and about $4 million in EBITDA for the full year. In my opinion, this contribution should support the company’s topline in 2024 as it continues to scale down GCR revenue, leading to an almost flat revenue growth in FY24 for the company.

While the company continues to progress on its revenue percentage mix shift strategy for margin growth, it is also focusing on evolving its service offering, to boost its margins further in the longer term. In the past few years, the LMB has transformed itself from a mechanical contractor company to a building solutions firm through its unique service offerings primarily in the ODR segment, including On-demand facility services, Data-Driven Solutions, and Critical System Repairs, that has notably benefited the company’s margins.

Moving forward, the company continues its investment further in evolving and expanding service offerings within its ODR business. It is currently focusing on services related to Professional Consultative, Equipment Upgrades & Products, Building Automation Upgrades, Energy Efficiency Upgrades, and Decarbonization Initiatives in the coming years. These evolved service offerings should help the company boost margins further by reducing costs and improving efficiencies due to the company’s close relationship with its customers in such a project that allows the company to work closely to develop tailored solutions for its customers.

Apart from initiatives to grow margin, the company is also focusing on scaling its business across verticals and geographies through strategic acquisition and additional service offerings. Additional service offerings should ultimately result in recurring revenue as the company will be engaging with its customer leads actively, generating more revenue at a relatively higher margin. To scale further, LMB is focusing on six key verticals which are Healthcare, data centers, industrial manufacturing, life science, higher education, and culture and environment. Among these verticals, the Healthcare sector remains a top priority for the company due to stability and steadiness in operational spending in this sector and durable demand. Also, the company is experiencing gaining momentum in infrastructure spending in this sector and working with its customers to build spending plans for the coming years. In my opinion, this should help the company grow in this sector, benefiting the company’s top line in the longer term.

Talking about M&As, two recent acquisitions of ACME and Industrial Air, which we discussed earlier, are expected to significantly contribute to the company’s top line in the coming quarters. Going forward, strategic acquisitions will remain one of the key strategies to scale business for geographic expansion. The company also has a robust pipeline and is expected to continue to look further for potential acquisitions, that are aligned with the company’s objectives of growing share with emphasis on the industrial sector that will help the company in capability expansion in the future. In my opinion, the company’s strong free cash flow should enable the company to execute such acquisitions in the future, fueling the company’s topline growth in the coming years.

Valuation

I last covered this stock in April 2024, and since then, the company’s stock has been up approximately 60% as the company experienced a significant growth in its margin in the recent quarter. Currently, the company’s stock is trading at an EV/EBITDA multiple of 12.99x, representing a premium to its five-year EV/EBITDA multiple of 5.81x. This might look expensive, but this difference is primarily due to significant EBITDA margin growth in the last few quarters.

While the stock appears to be at a premium versus its historical average, it is still trading near its sector median of 11.32x, which includes companies like Bowman Consulting Group (BWMN), Concrete Pumping Holdings (BBCP), and Argon (AGX) that have an Enterprise Value below $1 billion. Among its peers, LMB has a forward EBITDA growth rate of 23.79% which is comparatively better than its peers, except for BMWN, which has a forward EBITDA growth rate of 30.5%. BWMN’s forward growth rate might appear to be better, but, LMB is in a better position due to its ability to pass on this margin growth to the bottom line, whereas, BMWN on the other hand, has a negative net income.

I expect the company’s topline growth to remain under pressure as the company continues to progress on its mix shift strategy, as it is yet to achieve its ideal percentage of ODR share in total LMB revenue, which is expected to reach up to 70% by year-end. However, the contribution from the recent acquisitions should partially offset the revenue loss caused by the mix-shift strategy. The EBITDA, on the other hand, should continue to expand as the revenue mix continues to shift towards higher margin ODR business, which should improve the company’s valuation further in the coming quarter.

Risk

The company has successfully benefited from the execution of its mix shift strategy to increase focus towards higher margin segment ODR. However, the company has to face volume losses due to this strategy, as the company’s topline declines for the second consecutive quarter. My thesis is built upon the consideration, that the company’s margin will continue to benefit from this initiative in the coming quarter. However, as the topline growth is anticipated to remain under pressure, at least in 2024, if the EBITDA growth also suffers due to some reason, the company’s valuation might be impacted negatively, which could potentially lead to poor stock performance in the future.

Conclusion

As discussed earlier, the company’s stock is trading at a higher valuation than its historical average, however, near its sector median multiple. The company’s margin has grown significantly in the last few quarters, and I expect, this to continue further as the company remains focused on expanding its higher-margin business, ODR. Revenue prospects, however, continue to be on the lower side due to revenue loss in the GCR segment to decrease its share in the overall business. The company’s long-term prospects remain favorable, and considering a reasonable valuation followed by the company’s growth prospects versus its peers, I would suggest to BUY this stock at the current levels.