1 Main Capital recently released its Q3 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 17% for the third quarter (net of fees), outperforming its benchmark, the S&P 500 Index which returned 8.9% in the same quarter. You should check out 1 Main Capital Partners’ top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.
In the said letter, 1 Main Capital highlighted a few stocks and Limbach Holdings Inc. (NASDAQ:LMB) is one of them. Limbach Holdings Inc. (NASDAQ:LMB) is a construction engineering company. Year-to-date, Limbach Holdings Inc. (NASDAQ:LMB) stock gained 161.4% and on November 17th it had a closing price of $9.88. Here is what 1 Main Capital said:
“Limbach Holdings (LMB) is a leading specialty contractor providing heating, ventilation, air-conditioning (“HVAC”), plumbing, electrical and building controls design, engineering, installation, and maintenance services in commercial/industrial markets across the US.
The company’s largest end market is the healthcare vertical, though it has a diversified base of blue-chip customers such as Disney and Facebook. In 2019, the company was ranked the 12th largest mechanical contractor according to Engineering News Record.
LMB came public in 2016 via merger with a SPAC to access equity markets to pursue an accretive roll-up of its industry. In a presentation at the time of announcement, management pointed out that the industry is dominated by small, family-owned branches that make attractive M&A targets. As these owners look to retire, there is a limited buyer universe which should allow LMB to accretively consolidate the industry.
However, quickly after coming public, the company began to disappoint investors by missing margin expectations and suffering from working capital related liquidity issues. By late 2019, investors had completely lost confidence in management and abandoned the stock, selling it down to $3 per share, well below its prior highs of $16, culminating in the board replacing both the COO and CFO.
Over the past year, the new management team and other legacy team members have implemented operational changes designed to address the issues that formerly plagued the company. For example, the company changed the way it bills and collects for projects. Also, regional branch managers are now required to seek approval for large projects and are prohibited from taking on projects that would strain labor capacity to the point where they may have to hire flex labor at expensive rates.
The immediate impact from these changes has been remarkable. Despite some COVID-19 related project delays, LMB has generated $35 million of TTM free cash flow (>$4 per share) and completely repaired its balance sheet from an overleveraged position last year to a likely net cash position by the end of this year.
Looking ahead, the company stands to benefit from added focus on ventilation by building owners and tenants due to the COVID pandemic. Additionally, the operational changes implemented by management should lead LMB to double its EBITDA margins. Lastly, the company will use its strong cash flow generation to execute on a highly accretive acquisition pipeline. If management executes, the company will regain credibility with investors, likely driving the multiple up meaningfully from its current level of 3x EBITDA.
Usually, the best investments are ones where investors benefit from rapid growth as well as multiple expansion. I believe LMB can deliver on both and am excited to see how the company performs in the coming years.”
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