EMCOR Group (EME)

Total return at 5 years: 2.6%/year = 2.4% appreciation + 0.3% dividend. The target price ($876) is ex-dividend; the $11 in dividends collected over 5 years are added separately.

The methods disagree: one places the value today above the price ($779) and the other below.

Today — expensive, no margin of safety: at $779 trades ~9.3% above its value discounted to today (~$713); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Preserva valor: the target price ($876) plus dividends yield just enough to preserve nominal capital, below the required 4% floor.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$443.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($779) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (4.9%/year) than we project (10.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$1.5 bn of owner earnings in year 5 (vs ~$2 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on NOPAT (EV/NOPAT). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 is the TTM ended 30 June 2026 (US$18,598 million of revenue). Year 1 anchors to the July 2026 guidance (revenue US$20,000-20,500 million, operating margin 9.5%-9.8% and diluted earnings per share US$32.00-33.25), the more recent of two guidance raises in the year. The year-1 operating margin comes in below the TTM (10.4%) because the guidance incorporates the integration of recent acquisitions (Miller Electric, closed in February 2025) and a second half historically somewhat weaker than the first; from year 2 the margin resumes the expansion the company has been showing since 2022 (5.1% to 10.4% operating margin). Growth decelerates smoothly from ~19% (year 1, consistent with guidance and with a record RPO of US$17,140 million, +44% year over year) toward ~7% by year 5 (the method's durable industrial/cyclical growth band). EMCOR is practically free of financial debt (it explicitly declares no outstanding debt beyond minor finance leases) and generates net financial income, not expense; the model values at the enterprise level, on a multiple of after-tax operating income, and the bridge comes down to the US$924 million of excess cash. Share repurchases are material (~1.3% a year of recent reduction) and are modeled with an explicit share path; the retained cash surplus is redeployed into bolt-on acquisitions already reflected in projected growth, so it does not accumulate as additional cash.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $876 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $779, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $876 in 5 years plus $11 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $713. Against the current market price ($779), the margin of safety is -9.3% (trades above the maximum → a premium is paid) and the total return at that price would be 2.6% annually.

• Entry multiple. 24× trailing-twelve-month after-tax operating income.
• Expected 5-year return. Only slightly above capital preservation in the base case, given the disciplined exit multiple.
• Margin of safety. Limited at the current price; the discount would require a price decline or a more generous growth path than the base case.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (85%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Cash generation. Positive and growing FCF, although working capital consumes cash in periods of strong growth.
• Return on capital. ROIC near 45%, well above the 10% bar.
• Reinvestment runway. Very low organic capex (~0.6% of revenue); growth is funded through bolt-on M&A, not capital-intensive capex.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

RPO is the highest-signal leading indicator for a construction contractor: revenue already signed but not yet recognized, and its acceleration (+44% year over year through June 2026, well above the 19% revenue growth) is the contractual basis behind the year-1 starting point of the growth path.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Revenue growth. TTM +18.9% year over year, accelerating from 13.6% in 2023.
• RPO / backlog. Record US$17,140 million, +44% year over year: a solid leading indicator.
• Reliance on a single driver. Much of recent growth depends on the AI data-center boom.

• Recurrence and predictability. A mix of large projects and recurring service contracts; RPO provides growing contractual visibility.
• Differentiated product or commodity. An execution service more than a differentiated product; it competes on reputation and capacity, not patents.
• Pricing power. Limited by competitive bidding; fixed-price contracts pass little pricing power to EMCOR.
• Behavior in recessions. Revenue and margins suffered in the last down cycle (2020-2022), with low single-digit operating margins.

• ✓Leverage (net debt / EBITDA)Net cash $0.9 bn
• –Interest coverage (EBIT / interest)no data
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 85% of ROIC
• ✓Value creation (ROIC − 10% bar)+35pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.6x — no over-investment
• !Float / working capitalConsumes cash $0.4 bn (positive WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.2% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Financial debt. Virtually none, outside minor finance leases.
• Liquidity. Cash of US$924 million and positive FCF generation.
• Multiemployer pension liabilities. Proportional exposure to ~200 multiemployer pension plans if covered unionized personnel is reduced.

• Capital allocation. Disciplined bolt-on M&A, opportunistic buybacks and a low but growing dividend payout.
• Alignment and integrity. Long-tenured CEO since 2011; no evidence of a controlling shareholder in this pass.
• Acquisition track record. Miller Electric (2025) was the largest acquisition in the company's history; integration is still ongoing.

• There is no clear source of discount of the missing-buyers or motivated-sellers type: the stock comes off a run of record results and guidance
• The current entry multiple (24× trailing-twelve-month after-tax operating income) already reflects the market's recognition of the business's quality and RPO acceleration

This is not a case of a cheap stock: it is an exceptionally high-quality company trading at a price that already incorporates much of that quality. The method, with a disciplined exit multiple within the industrial band, finds no additional margin of safety at the current price.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -12%/year (-46% total): the margin of safety protects the downside. The bull (+11%/year, +65% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Cyclicality. Dependence on the non-residential capital investment cycle and the data-center boom.
• Fixed-price contracts. Actual labor and material costs can exceed original estimates.
• Unionized workforce. ~62% of employees under ~450 collective bargaining agreements.
• Goodwill and M&A integration. Significant goodwill subject to annual impairment testing following recent acquisitions.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A narrow moat and ROIC 45% above the 10% bar, but the price sits above value (no margin) → great business, expensive.

• Peter Lynch Growth at a reasonable price (GARP)

  A cyclical growing 10% at a multiple/growth of 2.4 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 6% (EBIT/EV) + ROIC 45% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 5% vs our 10%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -12%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, stable; sources: efficient scale, intangibles, cost advantage → partially passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting 5%, within what we project (10%) — the story squares with the numbers.