Limbach (LMB)

Building systems company Limbach (NASDAQ:LMB) announced better-than-expected revenue in Q1 CY2025, with sales up 11.9% year on year to $133.1 million. The company’s full-year revenue guidance of $620 million at the midpoint came in 1.4% above analysts’ estimates. Its non-GAAP profit of $1.12 per share was significantly above analysts’ consensus estimates.

Company Overview

Established in 1901, Limbach (NASDAQ: LMB) provides integrated building systems solutions, including mechanical, electrical, and plumbing services.

Construction and maintenance services companies not only boast technical know-how in specialized areas but also may hold special licenses and permits. Those who work in more regulated areas can enjoy more predictable revenue streams - for example, fire escapes need to be inspected every five years. More recently, services to address energy efficiency and labor availability are also creating incremental demand. But like the broader industrials sector, construction and maintenance services companies are at the whim of economic cycles as external factors like interest rates can greatly impact the new construction that drives incremental demand for these companies’ offerings.

Competitors in the building services industry include Comfort Systems USA (NYSE:FIX), EMCOR Group (NYSE:EME), and Dycom Industries (NYSE:DY)

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Limbach struggled to consistently increase demand as its $532.9 million of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result, but there are still things to like about Limbach.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Limbach’s annualized revenue growth of 2.9% over the last two years is above its five-year trend, but we were still disappointed by the results.

This quarter, Limbach reported year-on-year revenue growth of 11.9%, and its $133.1 million of revenue exceeded Wall Street’s estimates by 10%.

Looking ahead, sell-side analysts expect revenue to grow 16% over the next 12 months, an improvement versus the last two years. This projection is eye-popping and indicates its newer products and services will fuel better top-line performance.

Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.

Limbach has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 21% gross margin over the last five years. Said differently, Limbach had to pay a chunky $78.99 to its suppliers for every $100 in revenue.

Limbach’s gross profit margin came in at 27.6% this quarter, marking a 1.5 percentage point increase from 26.1% in the same quarter last year. Limbach’s full-year margin has also been trending up over the past 12 months, increasing by 4 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Limbach was profitable over the last five years but held back by its large cost base. Its average operating margin of 4.9% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

On the plus side, Limbach’s operating margin rose by 5.2 percentage points over the last five years.

This quarter, Limbach generated an operating profit margin of 5.9%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Limbach’s full-year EPS flipped from negative to positive over the last five years. This is a good sign and shows it’s at an inflection point.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

Limbach’s EPS grew at an astounding 53.3% compounded annual growth rate over the last two years, higher than its 2.9% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Limbach’s earnings to better understand the drivers of its performance. While we mentioned earlier that Limbach’s operating margin was flat this quarter, a two-year view shows its margin has expanded by 2 percentage points. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Limbach reported EPS at $1.12, up from $0.69 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Limbach’s full-year EPS of $3.74 to grow 10.6%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Limbach has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5%, subpar for an industrials business.

Taking a step back, an encouraging sign is that Limbach’s margin expanded by 3.4 percentage points during that time. We have no doubt shareholders would like to continue seeing its cash conversion rise as it gives the company more optionality.

Limbach broke even from a free cash flow perspective in Q1. This result was good as its margin was 5.5 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Limbach hasn’t been the highest-quality company lately because of its poor top-line performance, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 22.8%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Limbach’s ROIC has increased significantly over the last few years. This is a good sign, and if its returns keep rising, there’s a chance it could evolve into an investable business.

Limbach reported $38.09 million of cash and $47.99 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $66.83 million of EBITDA over the last 12 months, we view Limbach’s 0.1× net-debt-to-EBITDA ratio as safe. We also see its $312,000 of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Limbach blew past analysts’ revenue, EPS, and EBITDA expectations this quarter. We were also excited its full-year EBITDA guidance outperformed Wall Street’s estimates. Zooming out, we think this quarter featured some important positives. The stock traded up 5.9% to $109.20 immediately following the results.

Updated: June 14, 2025 at 11:11 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Limbach.

Limbach possesses a number of positive attributes. Although its revenue growth was weak over the last five years, its growth over the next 12 months is expected to be higher. And while Limbach’s low gross margins indicate some combination of competitive pressures and high production costs, its expanding operating margin shows the business has become more efficient. On top of that, its astounding EPS growth over the last five years shows its profits are trickling down to shareholders.

Limbach’s P/E ratio based on the next 12 months is 33.3x. This multiple tells us that a lot of good news is priced in. Limbach is a good one to add to your watchlist - there are better investment opportunities out there at the moment.

Wall Street analysts have a consensus one-year price target of $128.25 on the company (compared to the current share price of $137.50).