Investor Essentials Daily

This company mastered the business model of outsourced specialization

April 5, 2024

Limbach Holdings (LMB) is a construction and facilities service provider offering design, installation, and maintenance for various sectors, with a focus on mechanical, electrical, and plumbing contracting, as well as energy infrastructure.

It specializes in complex systems for mission-critical environments across several growing industries.

The company has shifted towards Owner Direct Relationships (ODR), and long-term maintenance contracts with building owners, which have significantly increased profitability, contributing to over half of total sales and gross profit in FY 2023.

This strategic move towards ODRs has led to stable revenue streams, reduced competition, and an upward trend in the company’s Uniform return on assets (‘‘ROA’’), positioning Limbach for future growth and improved shareholder value.

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Limbach Holdings (LMB) is a full-service building construction and facilities services company. The company provides integrated design, installation, maintenance, and repair services for the built environment.

Limbach offers a comprehensive suite of services for commercial, institutional, and industrial facilities. This includes mechanical, electrical, and plumbing contracting as well as energy infrastructure modernization.

The company designs, engineers, and installs complex HVAC, power, and control systems for mission-critical environments.

Limbach serves a diverse array of sectors including healthcare, life sciences, data centers, higher education, cultural/entertainment, and industrial/manufacturing. Many of these end markets are experiencing steady growth driven by long-term macro trends around innovation, technology, and sustainability.

While Limbach has traditionally worked on both new construction projects and existing building services, management recognized the higher profit potential of long-term maintenance agreements known as Owner Direct Relationships (ODR).

Under ODR contracts, Limbach works directly with building owners to provide all facility services over extended periods, often 5-10+ years.

Limbach provides specialized facility services that require expertise and resources their clients may not have in-house, such as live steam boiler maintenance. Over time, they expand the scope of services they take on for clients by cross-selling additional offerings and completing projects like equipment replacement.

They have in-house engineers and technicians with deep institutional knowledge from long-term experience working on clients’ unique infrastructure. Limbach offers 24/7 responsiveness and quick resolution of issues, even on weekends, to ensure critical building systems remain operational.

Their business model involves taking over specialized services that are beyond their clients’ capabilities, allowing clients to focus internal resources on other priorities. This establishes Limbach as a long-term, trusted partner through the reliable delivery of services important to their clients’ operations and the preservation of critical assets.

ODR revenue is up 128% from 2019. In FY 2023, ODR accounted for 51% of total sales and 64% of the gross profit. Strong growth in the higher-margin ODR segment has boosted Limbach’s profitability metrics.

Uniform return on assets (‘‘ROA’’) has trended upwards from 6% in 2018 to 17% in 2023.

Take a look…

Management expects ODR revenues to continue expanding as they sign new contracts and cross-sell services to existing customers.

The transition towards the stable ODR model makes Limbach’s revenue and cash flows less volatile over the long run. This strategic shift also helps reduce competition for one-time projects and allows Limbach to capitalize on its expertise in operating and maintaining complex building systems.

While Limbach has demonstrated consistent top-line growth and improving fundamentals in recent quarters, the stock remains undervalued relative to growth prospects.

As the company further scales up its ODR business and expands into high-growth sectors, Limbach is well-positioned to deliver higher profitability and unlock shareholder value in the coming years.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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