Limbach Stock: Mitigating headwinds from supply chain issues (NASDAQ:LMB)
Since my last article, Limbach Holdings (NASDAQ:LMB) the stock is down almost 15%. In this article, I will review 2021 results, outlook for LMB and a valuation update.
2021 results – revenue in in line with expectations but gross margin better than expected
The results were released on March 16. As expected, revenues decreased by 13.7%. As LMB continued to focus on smaller, more profitable GCR projects, GCR’s revenue decreased by 20.6% to $350.1 million. What’s interesting is that while revenue decreased by $90 million, gross profit remained constant at $45 million. As a result, the gross margin improved from 10.2% to 13.0%.
ODR revenues increased by 10.3% to $140.3m. Gross margin for this segment was 28.9%, above the upper limit of management’s long-term expectations of 25% to 28%. Thanks to better margins in both segments and an improved mix, the gross margin increased from 14.3% to 17.5%.
However, the improvement in gross margin was fully offset by higher SG&A expenses. The increase is due to professional fees related to the recent acquisition and normal operating costs that were not incurred in 2020 due to the pandemic.
Another positive point, the interest charges were reduced from 8.6 million USD to 2.6 million USD thanks to the refinancing of the debt at a lower interest rate.
ODR segment can be a hedge to supply chain issues
Experts expect the supply chain issues to continue into 2022 and even 2023. Some of the issues are not so easy to fix and require time, such as the shortage of chips. While all the big players like Intel (INTC) have announced the construction of new factories, these will not be ready anytime soon. However, LMB can benefit from this supply shortage or at least mitigate its impact. The shortage of new equipment is driving customers to make the most of their current assets. Extending the life of equipment means more frequent maintenance – one of the ODR services. But running older equipment for longer than recommended leads to more frequent breakdowns, leading to more emergency repairs – another ODR service. On the earnings call, Mike McCann explained that.
One interesting benefit we realized from supply chain issues is that our time and material services saw a 44% year-over-year increase. This trend appears to continue through the first quarter of 2022.
Since new equipment is not immediately available, owners invest in their existing old equipment, but this is not always a long-term solution. Old equipment eventually breaks down and this takes care of emergency repairs and unscheduled work. 2021 was our best year yet for preventive maintenance contract sales. We added sales resources after canceling investments in 2020. These resources tend to take a year to produce, and we are now seeing these investments pay off.
Improved outlook thanks to management delivering on its promises
Note that revenues will continue to decline until 2025, when the size of the ODR segment will contribute to LMB’s net growth. Regarding the gross margin, there will be a gradual improvement in the margin thanks to the mix of improvements and the integration of acquired businesses and the capture of synergies. Gross margin in 2022 may decline slightly as I expect gross margin to retract towards the guided band.
Insiders continue to buy stocks
In the first quarter of 2022, management and directors bought more shares, these are informative purchases.
Updating the model for 2021 results, the target price dropped from $21 to $22 per share. At the current stock price, you are paying for the GDR business and only 60 cents for a $16 valued business.
The target price implies an EV/EBITDA multiple of 10.5x, which is significantly higher than the current multiple of 4x. However, as ODR contributes more to LMB EBITDA, I expect the multiple to approach more ODR peers as shown in the chart below.
The investment thesis has not changed since our previous article. On the other hand, LMB shares are more attractive as the share price fell by 15% while the financial results met or exceeded our expectations.