LMB 2.16.26

Agreed. I'm not so sure about the quarter. I talked to them not too long ago and pushed them on the backlog. They made a couple of points. They said that PPI had much more quick-burn work, so that you couldn't assume that it was mathematically the same in terms of backlog-to-sales. If you take that into account, the order trends might be a bit better than people initially thought. It's really hard to know, but there’s some noise there at the moment. I'm curious to see what they report. Ultimately, even more important than the actual results will be the orders and the guide for 2026.

There was actually an error in the short report that didn't make much difference, but I noticed it later in the comment thread, where he's parsing orders and backlog as a percentage of revenue. He has a number wrong there, which makes things look a little better, but his directional point makes sense. They've never converted, and there's no precedent of having that much sales relative to where the backlog was at the third quarter. I think they've definitely set themselves an ambitious target, but that was certainly reflected when the stock tanked into the $60s. Maybe there's a downside again at this point.

There were many leaps taken in the report. Some things made sense, but claiming that one quarter of order decline proves structural weakness instead of lumpiness seemed like a stretch. Also, the point about management relabeling GC-type work as Owner Direct, making it more service-like than it really is, fixed-price work doesn't mean greenfield construction work. The claim that the runway was exhausted and wallet share maxed by 2026 directly conflicts with management's commentary. Maybe management is a little off, but saying one data point correlates to a structural decline seemed like a leap.

After following the business for a while and speaking with management, I thought there were some mitigants to the risks raised. The stock reflected both valuation compression and some of the risks embedded in that report. It was unclear to us why the stock declined so much, given its limited data center exposure. For Limbach, it feels like there's still a runway to do exactly what they've been doing. I don't know if there will be step-function changes in growth and margins compared to 2022, but it still seems like there's an opportunity for them to grow organically and inorganically. There should be some margin expansion as they do that, and I don't think gross margins should top out at the current levels.

The only thing that came back from our work was that their labor situation seems very different from some of the other companies in the space. It's super specialized. From a productivity perspective, they have these super technical people who can do what they do with their customers and understand complex systems. Maybe they're not accelerating as much as an EMCOR, if at all. I’d imagine we have another service-based company that has an advantage on that side, since technicians are leaving the industry for what this other company does. As a result, this other business has an advantage because it’s the market share leader. If you’re a technician, you want to work for this business because that's where the work is. Maybe Limbach is somewhat similar to that, although not apples-to-apples.

I've asked them as well and probably haven't gotten as many details as I'd like, but the one thing that came back was that they're maybe in a slightly different situation. I think in mid-2024, they had shed some labor, weren't hiring 100 people at a time, and weren't working on $200 million data centers. I don't know what their assumptions are for 2026. In Q3, they called out bringing on additional account execs, who aren’t maybe field-type people.

I’d be a bit worried if multiples started to creep up. I believe there's more competition as well. High single digits would worry me a bit, especially because there might have been a timing hiccup on the Pioneer deal, where the market thought Pioneer would contribute a certain amount of revenue this year, and they walked that back. Maybe that contributed to the stock decline.

Maybe some of the accretion would fade if they pay the multiples, but between the earn-outs or seller notes and the mix pruning, I'd imagine they can turn a 7.5x to 6.5x over time into a sub-6x. They have a playbook for doing it, which seems to be going okay. Not using leverage obviously gives them optionality to be patient, whereas maybe other parties are doing that. If the next couple of deals came in at 9x with no opportunity to upgrade the mix and minimal synergy, I’d probably be nervous. But the M&A strategy is fairly young. They really just kicked it off a few years ago.

Not really beyond what he said on the last call. He tried to address it on the call because they've obviously been getting asked about it a lot. He talked about a mix shift towards small project work. If you really parse everything he said, you can kind of make the numbers consistent with the guide. He gave a quite detailed breakdown on that call of how it breaks down into quick-burn work. I never got beyond his comments there, honestly.

He made two comments. He said that healthcare spending, specifically the hospitals, had seen a bit of an air pocket, but they were seeing it improve. Then he said government-related or educational institutions had really stopped, but they saw a better ramp this year.

Right. There was a question on the call about how much visibility they have on the quarter, because clearly, everyone’s struggling to reconcile the backlog with the quarterly guide. They're implying they'll have a really big quarter in non-backlog work that flows into sales. That's where we're just keeping our fingers crossed and trusting that they know what they're doing. That was the crux of the short report. They're saying they're going to book this many sales in the quarter, and that's a really big number. Either they just overguided, or they're not communicating very well to investors why in-quarter sales are going to be so strong.

There are a few scenarios. One scenario is they miss the quarter, but orders go up solidly, and they have a solid guide. In that scenario, the stock probably holds. There's a scenario where they miss the quarter, orders are weak, and the guide isn't great; the stock is down 20%. Then there's a scenario where they make the quarter and the guide is good, and then the stock's probably up 20%. There's a wide range of outcomes for this quarter.