IES Holdings

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

IES Holdings is a national provider of industrial, infrastructure, and communications services, primarily operating in the US, with a diverse range of offerings in electrical and technology solutions, as well as other sectors.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

IES Holdings (IESC) operates as a diversified specialty contractor, with a revenue model spanning across multiple sectors including Communications, Infrastructure Solutions, Residential and Commercial & Industrial. This diversification is a key characteristic of their business strategy.

Business Overview

IES Holdings operates across four main segments:

  1. Communications: This segment focuses on the design, build, and maintenance of communication infrastructure.
  2. Infrastructure Solutions: This segment provides electrical and mechanical services across various industries and includes industrial automation.
  3. Residential: This segment primarily focuses on residential building and includes electrical installation as well as structured cabling.
  4. Commercial & Industrial: The fourth segment consists of electrical, and related services for commercial and industrial end markets.

The company’s revenue is primarily derived from services and projects that are awarded based on competitive bids and customer preferences.

Trends in the Industry

  • The US market for commercial and industrial construction is seeing a surge driven by the growth of data centers and electric vehicle manufacturing. Infrastructure investments have been fueled by government initiatives such as the Bipartisan Infrastructure Law, which has led to the growth of the sectors IES serves.
  • There has also been a recent rise in near-shoring activity from the industry, driving a surge in manufacturing in the US.
  • The rise in AI applications also provides considerable tailwind to the company’s growth.

Competitive Landscape

The competitive landscape for IES Holdings is varied, consisting of both regional and national players. Competition is driven by:

  • Pricing: Competitive pricing is a major factor.
  • Specialization: Certain areas of expertise can help a firm to win contracts.
  • Geographic Presence: Close proximity to customers matters for response times.
  • Relationships: Long-term relationships matter a lot.

The company attempts to differentiate themselves through their national presence, diversified offerings, and ability to self-perform.

What Makes IES Holdings Different

  • Breadth of Services: Unlike smaller players with more limited capabilities, IES can handle large and complex projects across a broad range of sectors.
  • National Reach: The company has a national scale with local execution capabilities, which gives it the ability to execute projects with high quality and efficiency all across the US.
  • Long-Standing Relationships: IES has a focus on long-term relationships with its clients, which translates to repeat business.
  • Substantial Experience: The company has more than 100 years of experience, which gives it a unique insight and reputation.

Financial Analysis First, let’s review the most recent financials for the most recent quarter and then analyze overall financials from prior periods to identify trends. Here are a few observations:

  • Revenues: The company has been showing robust growth in revenues.
    • The company’s Q3 2024 revenues of $566.2 Million represents a growth of about 25% YoY from Q3 2023.
    • The company has also increased revenues by ~20% over a year, with their revenues for the year ended Sept 2023 being ~$2.4 Billion, a considerable jump from ~$2 billion in the year ended 2022.
  • Profitability:
    • Gross margins are around 15% for both Y2023 and Q3 2024.
    • Net income also shows considerable improvement, as the net income for the three months ended September 2023 was $10.1M, which is a great increase from a loss of $13.8M in the same period a year ago.
    • Net income for Y2023 was around $66.2 million, compared with $10.3 million for Y2022.
  • Financial Strength:
    • The company’s net debt has come down considerably from $340 million in 2021 to only $89 million in 2023.
    • The company’s liquidity has improved significantly, going from $171 million to $405 million.
  • Working Capital & Cash Flow * In 2023, the company’s cash flow from operations was a substantial $234.4 million, up from $107 million in the prior year.
    • The company’s working capital is also decent in the last year with an increase of about $157 million.
    • Inventory has come down by 12 million, compared to a year ago, with current assets exceeding current liabilities by $239 million, indicating good liquidity.

Overall, the company seems to be exhibiting a positive trajectory. The revenue has continued to increase, profits have grown massively, cash flow and liquidity has improved, and debt levels have reduced.

Moat Assessment

IES has a narrow moat (2 out of 5). The firm does enjoy certain competitive advantages which are not very high, but exist to some degree.

  • Barriers to Entry: IES has substantial economies of scale and scope in the services it provides. It operates in a fragmented industry and is one of the leaders among few players in all the core industries. This gives it a slight competitive advantage and is very hard for new players to quickly become leaders in such a complex industry.
  • Switching Costs: For certain projects, such as integrated service projects, there could be some level of customer stickiness and switching costs involved.
  • Network effects While not a dominant driver for IES, its ability to manage a lot of locations gives it an advantage over smaller players who are present locally.

However, these aren’t strong enough to have a wider moat rating, because of the following factors:

  • Standardized Services: Most of the services it provides can be fulfilled by many players, especially the smaller local players.
  • Intense competition: The industry is highly competitive with various small players fighting for market share. There is limited opportunity to differentiate for the most part.
  • Price Sensitivity: Most of the contracts that the company is awarded are based on low-price bids, and thus the company is susceptible to pricing pressure.

Risks to the Moat and Business Resilience The company faces significant risks that can affect its moat and the long-term business model:

  • Economic Cyclicality: Construction businesses are inherently cyclical, and so revenues could take a plunge during times of economic slowdown.
  • Competition: Aggressive competition may erode margins and make it difficult for IES to win contracts in the future, given the commodified nature of its services.
  • Labor Costs and Availability: An increase in labor costs or shortage of labor may increase project costs or delay in project completion.
  • Acquisition-related risks: In recent acquisitions, the company could face risks including integration issues and cost overruns, which could potentially hurt its business in the short term.
  • Customer Concentration: Loss of some of its key contracts can create large losses for IES. The company exhibits good resilience to these risks due to its diversified revenue base and long history of operation, but is still susceptible to all these risks, especially during recessions.

Understandability Rating

The understandability of IES’s business is rated as 3 out of 5.

  • The company has a relatively complex portfolio with operations in different segments, which all have different characteristics. This complexity makes the company a bit harder to evaluate. However, at the core, the business is relatively simple-the company provides contracting services and that is easy enough to understand, therefore the middle rating.

Balance Sheet Health Rating

The company’s balance sheet health is rated as a solid 4 out of 5.

  • The company’s balance sheet has shown improvement with reduced debt and increased cash.
  • The company has a good liquidity cushion for potential shocks in the economy.
  • The company has a good track record of managing its finances.