Better Buy: EMCOR Group or Granite Construction?

By Motley Fool Staff | More Articles
December 7, 2009 | Comments (1)

In a new Motley Fool series, we pit two stocks against each other on five criteria to determine the better buy.

Today's matchup is EMCOR Group (NYSE: EME ) vs. Granite Construction (NYSE: GVA ) . Using five short-of-scientific-but-carefully chosen criteria, let's determine which is the better buy according to the numbers:

	Factor	EMCOR Group	Granite Construction
Cheapness	(P/E ratio)	9.0	13.0
Growth	(5-year growth rate)	36.3%	13.8%
Operations	(net margin %)	3.12%	4.6%
Balance Sheet	(debt/equity ratio)	.17	.37
CAPS Rating	(scale of 1 to 5 stars)

Round 1: Cheapness

Advantage: EMCOR Group. Cheapness is determined by P/E ratio. The lower the better. Be careful of earnings near zero that skew the ratio, one-time gains and losses, and pasts that aren’t indicative of futures (the more dynamic the industry, the more this is true).

Round 2: Growth

Advantage: EMCOR Group. Growth here is the trailing 5-year EPS growth rate. This trailing earnings growth helps put notoriously-optimistic Wall Street projections in perspective.

Round 3: Operations

Advantage: Granite Construction. Net margin percentage shows how efficiently a company turns revenue into profit. The more similar the business models, the more relevant the comparison.

Round 4: Balance sheet

Advantage: EMCOR Group. As with net margins, the debt to capital ratio is most relevant in comparing companies in similar industries. In this battle we give the nod to the lower-debt company, but attention should also be paid to the cost of debt, interest coverage ratios, and the stability of the business (the more stable a company’s operations, the more debt it can safely carry).

Round 5: CAPS rating

Advantage: EMCOR Group. A company’s CAPS rating is our community’s opinion of the stock. You can get more information on your stocks -- and our community’s opinions of those stocks -- by clicking over to CAPS area.

Each of these five rankings need more context -- like, how these companies stack up against key competitors such as MasTec (NYSE: MTZ ) and Tutor Perini Corporation (NYSE: TPC ) . But these basic numbers suggest that EMCOR Group is a better buy. What do you think? Let us know in the comments section below.

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Report this Comment On December 08, 2009, at 8:55 AM, pillpoppinpuppy wrote:

GVA has valuable quarries, but I agree EME is the better buy.
Emcor is positioned to benefit from government stimulus spending. I believe this spending will accelerate in 2010 as the incumbent party positions for the midterm elections. Specifically, The American Recovery and Reinvestment Act provides funding to the following areas that could directly benefit Emcor: transportation $49.3 billion, energy $30.6 billion, water and environment $20.1 billion, buildings $13.4 billion, and defense and veterans $7.8 billion. Examples of earmarked stimulus funds include: improvements to airports and highways, construction at veterans' medical facilities, construction of new waste and water systems in rural areas and 2,300 construction and rehabilitation projects at military facilities around the country. Emcor is highly qualified for these projects; e.g., refer to sampling of significant (non-ARRA) projects the company has been awarded over the past 18 months in the table below. Emcor has not included any ARRA potential in its projected 2009 revenue and EPS of $6.2 billion and $1.80, as it expects such projects to begin to impact revenue and income in the first and second quarters of 2010. Considering that, in 2008, the company had about a 1% share of all non-residential construction put in place in the United States, one could extrapolate that $1.3 billion of the $130 billion in funding will inure to Emcor beginning in 2010.
Significant Projects Announced During Past Since 1/1/08
Institutional: (1) Expand facilities Services for UK's Air Traffic Control
(2) Mechanical infrastructure for Rice Univ.
(3) Facilities services contract for US Courthouse Building
(4) Facilities services contract with US DHS for the US Coast Guard
(5) Spanish Embassy contract for facilities operations
(6) Contract Renewal Nebraska Public Power District for outage & maintenance services
(7) Energy efficient street lighting system for own of Islip, NY
(8) Electrical systems for new research ctr. at Wheaton College
(9) Electrical systems at new UT Museum
(10) S. Kensington Natural History Museum facilities management extension
(11) Electrical systems for Naval Air Station, San Diego
(12) Electrical installation, San Jose Int'l Airport
(13) Operation & maintenance of the John W. McCormack Federal Building in Boston
(14) Facilities mgt. & energy consultancy for Cardiff Airport
(15) Electrical systems at two new buildings’ expansion project at SD County Operations Ctr.
(16) High voltage electrical systems at Moorpark College, CA
(17) Energy efficiency project for Duneland School District, CT
(18) NASA’s Dryden Flight Research Ctr facilities in CA for operations & maintenance services
(19) Electrical systems for the new US Coast Guard HQ in Washington, D.C. (4Q09)
(20) Mechanical systems for the new Maricopa County Court Tower in Phoenix, AZ (4Q09)
Healthcare: (1) Electrical & mechanical Infrastructure for UCSD Med Ctr.
(2) Mechanical infrastructure for London Health Sciences Ctr.
(3) Mechanical systems work at the Univ. of Miami School of Medicine
(4) Extensive work at St. Vincent Medical Ctr. addition
(5) Mechanical systems contract for Phoenix Children's Hospital expansion
(6) Electrical systems for St. Mary’s Medical
(7) Electrical systems for Veteran Health Admin. outpatient clinic, Oceanside, CA
(8) HVAC & plumbing systems upgrade, Neonatal ICU at Florida Hospital in Orlando
(9) Mechanical systems contract for TX Children's Hospital new maternity center
Commercial: (1) Electrical infrastructure for New Kirkland & Ellis Offices
(2) Mechanical Systems Contract for Giorgio Armani NYC
(3) Mechanical & electrical systems, 110 Fetter Lane, London
(4) Electrical systems, Cricket Wireless headquarters, San Diego
(5) Renovation & maintenance of Verizon Wireless central switching station
Industrial: (1) Design/build of cogeneration plant, CA Correction Ctr.
(2) Contract for cooling tower replacement for Smith Int'l
(3) Facilities and energy management of three U.S. plants of Patheon Inc.
(4) Mechanical systems at KC Power & Light headquarters
Hospitality: (1) Mechanical infrastructure for Westin Convention Ctr. Hotel
(2) Mechanical & fire protection systems for Mohegan Sun Resort & Casino
(3) Fire protection, plumbing, & HVAC for Mohegan Tribal Gov’t & Community Ctr.
Transportation: (1) Electrical systems upgrade of Wantagh State Parkway
(2) Contract by Nassau County, NY for traffic signal upgrade
(3) IP CCTV security subcontractor at St. Pancras, London Underground
(4) Fire detection & alarm systems at Amtrak’s NYC Penn Station
(5) Electrical systems for San Pedro CA traffic surveillance & control (4Q09)
Water: (1) Electrical systems for Lancaster Water Reclamation Plant
(2) Electrical construction of Water Treatment Plant for Dept of Envir. Protection
(3) De-chlorination upgrade project at Humber Wastewater Treatment Plant, Toronto
(4) Odor control HVAC upgrade project, Ashbridges Bay Wastewater Treatment Plant, Toronto
Another opportunity for Emcor is the expected growth in projects to increase energy efficiency in buildings. Emcor is one of the largest companies in the U.S. involved in energy efficiency, including energy consulting and energy monitoring. It would be a logical beneficiary of government-sponsored and private efforts to significantly increase the efficiency of modern buildings.
Growth also will derive from international expansion. Although Emcor has had operations in Canada and the U.K. for many years, it recently expanded into the Middle East to provide facilities services and property management. In June, Emcor formed a joint venture in Saudi Arabia and has been awarded a $133 million facilities management and operational support contract. Operations have also been established in Abu Dhabi, Bahrain, Dubai, Kuwait, Oman and Qatar, and the company has over 1,000 employees in the region.
If EME can increase EPS at a rate of 7% over the next four years (over the past 10 years, EPS has increased at an annual rate of 25%), it will generate a substantial amount of free cash flow. Were EPS to increase at approximately 7% from 2010 through 2013, cumulative cash flow and free cash flow would be approximately $930 million and $785 million, or $14 and $12 per share.
Trading at five times economically depressed EBITDA, Emcor’s valuation is attractive. Assuming EPS grows at 7% after 2009, the shares are currently trading at three times estimated 2012 EBITDA. The stock is also cheap on the basis of an estimated leveraged acquisition value of $37 based on expected 2009 results. (The valuation assumes an 11.9% weighted average cost of capital, fixed charge coverage of two times, and an equity component of 40%.) Officers and directors own 8% of outstanding shares.