2023-12-28 03:09:04 ET
Summary
- IESC is my top pick for 2024.
- FY23 revenues increased by 9.7%, driven by strong performance in the infrastructure, residential, and communications segments.
- IESC is financially and technically solid, with potential for margin improvement and revenue growth, making it undervalued and a strong buy.
IES Holdings ( IESC ) offers infrastructure products and engages in the installation of technology and electrical systems. IESC is my top pick for 2024, and there are several reasons behind it. I think it can be quite rewarding in 2024, and I will discuss the reasons behind it in this report. I assign a strong buy rating on IESC.
Financial Analysis
IESC recently announced its FY23 and Q4 FY23 results . The revenues for FY23 were $2.3 billion, a rise of 9.7% compared to FY22. Its infrastructure solutions, residential, and communications segments performed quite well, which was the main reason behind the company's increased revenues. The revenues from the infrastructure solutions segment grew by 30% in FY23 compared to FY22. A strong demand for its generator enclosure products was the major reason behind the solid performance in its IS segment. The revenue from the residential segment grew by 13% in FY23 compared to FY22. This segment benefitted from strong demand in the single-family housing market, especially in Florida. The revenues from the communications segment grew by 7% in FY23 compared to FY22. The major reason for the revenue rise in this segment was higher demand from data center customers. Its operating income margin in FY23, excluding the sale of assets, was 6.1%, which was 2.6% in FY22. The significant improvement in the margins was due to the company's constant efforts to improve them. The management dedicated themselves to margin improvement and reorganized the company in FY23. They reduced their activities in underperforming branches, decided to quit low-margin businesses, and streamlined their procurement process. The management's efforts to focus on margin improvement resulted in a huge rise in profitability. The net income for FY23 was $119.8 million, which was $40.2 million in FY22.
Not only the annual but its quarterly results were solid. The revenues in Q4 FY23 grew 5% compared to Q4 FY22, and the net income more than doubled. IESC impressed me in FY23, and the results clearly show it. However, if you think it can't get better than this, I want you guys to know that I believe it can perform way better in FY24 compared to FY23, especially in terms of profitability. IESC is often criticized for its low-margin business; however, I think the management's efforts to work on its margins might completely change the scenario. Its profitability might increase significantly, and the management dedicated itself in FY23 to margin improvement. It took several steps, like focusing on high-margin business, disciplined bidding, streamlining its procurement process, and reducing activities in underperforming branches. Hence, I believe the margin improvement that we saw in FY23 wasn't a one-time thing or a lucky year. I expect solid margins in FY24 as well. In fact, I expect the margins to be better than they were in FY23. The initiatives the management took in FY23 will help them in FY24. Now, talking about revenue growth, the recent downtick in the mortgage and interest rates and the easing of the inflation is positive for them, and it will boost its revenue if the inflation and interest rates remain under control. So, considering the potential revival of the construction industry, I am optimistic about its revenue growth. In addition, despite no supply chain challenges, its backlog reached $1.5 billion in FY23, which is 21.1% higher compared to FY22. So, the increased backlog is also a positive.
Technical Analysis
IESC is trading at $82.1. The chart of IESC looks quite good. The stock gave a massive breakout in June, and after the breakout, the stock rallied around 35% in just two months. After rallying 35%, the price corrected around 20%, which I think was healthy because I believe a rally without any correction isn’t sustainable. After the correction, the stock broke its all-time high of $75 with a huge green candle and decent volumes. To remind you, I am analyzing this stock in a monthly time frame, which is considered the strongest and most reliable time frame. Hence, I believe it is quite bullish, and we might see new all-time highs in the coming times. As the stock is near its all-time high, there are no resistance zones to stop the price. So, I am bullish on IESC, and I believe the chances of it going up are quite high because the breakout has happened after a healthy correction.
Should One Invest In IESC?
IESC is looking financially and technically solid, and it is looking fundamentally strong, too. Its COF by the end of September 2023 was $153.9 million, which was $16.3 million in September 2022. So, its cash-generating ability has improved significantly, and the company had cash worth around $75.8 million by the end of September 2023, which was $24.8 million in September 2022. The cash position of IESC looks solid, but it becomes even more impressive that they have no long-term debt. So, this company is now basically a cash-generating machine with no debt. Now, looking at IESC’s valuation. IESC has a P/E [TTM] ratio of 18.09x, which is lower than the sector median of 23.02x. It is trading below industry standards, and I think it can trade at a way higher valuation in the future. Its margin improvement in FY24 can significantly increase its income, which might significantly increase the company’s EPS. So, the scope for P/E expansion is great. Hence, not only does current valuation and good results make it undervalued, but its scope of growth in FY24 makes it criminally undervalued. Hence, I think it can be quite rewarding to its investors in FY24. Hence, I assign a strong buy rating on IESC.
Risk
The regional economic conditions affecting the construction industry could impact their quarterly results. Specifically, an extended period of low demand in the oil and gas sector or tighter regulations on the sector may depress the housing market in some areas, which would lower demand for the services offered by their Residential division. The timing of planned outages or capital projects at the facilities of Infrastructure Solutions' industrial clients, the demand for data center design, construction, and site support, and shifts in public infrastructure, power, and steel market spending can all have an impact on the company's industrial service revenues. The price volatility of oil may also have an impact on rail and industrial customers. As a result, their performance in one quarter might not be a good predictor of what to anticipate from them in subsequent quarters or for the full year.
Bottom Line
No doubt the results were fantastic, but I think it is just the start. I am optimistic about them performing better in FY24 than in FY23. The margin improvement initiatives might result in a significant improvement in profitability and EPS, and the easing of housing market conditions can boost its revenues in FY24. In addition, the technical chart of IESC looks solid, and it can skyrocket in the coming times. So, considering the positive outlook, low valuation, and its solid financial and fundamental position, I assign a strong buy rating on ISEC.
For further details see:
IES Holdings: My Top Pick For 2024