$LMB：Limbach 错过数据中心热潮，机会反而来了？| 1 Main Capital

I’m happy to have Yaron Naymark from 1 Main Capital back on. I thought this was the fifth time, but it must be the sixth because he’s got the YAF shirt on. He surprised me.

What’s up, man? I almost wore the hat, too. But figured out.

I’m just excited that I don’t have to spend the money on the shipping cost for another shirt. I was like, “Oh, I want another one. I need another one.”

No, it’s one time only. I’m super excited to have you back on. If my Twitter DMs and everything are any indication, everybody’s excited to have you back on. It’s been a while, but we’re going to talk about a stock. Before we get there, a reminder that nothing on this podcast is investment advice. There’s a disclaimer in the show notes and another one at the end of the podcast.

Yaron, this is actually the second time we’re going to talk about Limbach. You and I discussed it in June 2023. I had to look it up because I wasn’t sure if it was a fever dream. We talked about Limbach a lot. The stock did incredibly well—it was up about 6.5 times over the next 2½ years after we discussed it—and it has come back quite a bit since then. It’s down about 75% from the peak, but it’s still up 80% from the first pitch, so if you held it, you’re still pretty happy.

1. What Limbach is and why he is double dipping

You are back in the stock, double dipping on the stock, and when it's come on the podcast. That’s the big overview for everyone, so I’ll toss it over to you. What is Limbach, and why are you double-dipping here?

Like you said, I thought the setup was really compelling in 2023 when we spoke about it. I think it’s back to being almost as compelling now as it was back then, which is why I wanted to talk to you about it. For those who may not have watched the 2023 version, I’ll give a history of the company and the overall pitch instead of assuming people watched it.

2. Enron, a SPAC, and the shift from general contracting to owner direct

It was 3 years ago, and I was one of the 2 people on the podcast. I could barely remember it, so I’m sure the listeners might appreciate that, too.

I’ll give a quick overview of the company’s history, how we got to where we are, and why I think the stock is compelling now. Then we can go into Q&A from there.

Limbach is an MEP contractor—mechanical, electrical, and plumbing. They specialize on the mechanical side, primarily HVAC, for mission-critical infrastructure assets, such as hospitals, advanced manufacturing facilities, and the like.

The company is very old—over 100 years old. It was founded by a guy with the last name Limbach. He eventually sold it, and it ended up in the hands of Enron. Enron went bankrupt, and a private equity firm bought the company out of bankruptcy. The firm then brought it public in 2016 by merging it with a SPAC.

The vision for the company when it went public was to roll up small, local contractors over time at attractive multiples. The end market was very fragmented, and the smaller players typically traded for 4 to 5 times EBITDA. Now that may have crept up to 5 to 6 times EBITDA, but there was a long runway for consolidation, and the public vehicle was meant to pursue that opportunity.

It was run by a CEO at the time, and the company had some issues on the general contractor side. They took on some major new-construction projects and had major project write-downs on them. They lost a bunch of money and became a distressed equity going into COVID.

They managed to dig their way out of that distress through good earnings growth and free-cash-flow generation, deleveraging the balance sheet. Now it’s back to being a consolidation and roll-up story.

Over that period, the CEO was replaced in early 2023. The former COO, Mike McCann, was promoted to CEO. Mike had started a transition when he was COO, and he continued it as CEO: transitioning the company from a primarily GC business, where they were working on major new-construction projects, to an owner-direct business, where they were working on upgrades, repairs, retrofits, and adding a wing to a hospital.

Those projects tend to be more working-capital-efficient and higher-margin, and they’re less susceptible to blow-up risk. That transition went really well for them. When it went public, the business was probably 80/20 on the GC side, and as of last year it was probably 75/25 on the owner-direct side.

Margins expanded from low-single-digit EBITDA margins to low-double-digit EBITDA margins. The company made some acquisitions along the way, grew nicely, and everything was going great for the stock.

3. Called a data center winner when management said otherwise

At one point last year, Limbach was caught up as a data-center winner—wrongfully so, in my view. At the time, the company was not pursuing, and was vocal about not benefiting significantly from, data-center business. But a lot of their competitors and other MEPs in the space were benefiting tremendously from data centers, so people assumed Limbach would benefit from them as well.

The company was singularly focused on capitalizing on its owner-direct relationships, which were growing very nicely up until it hit the recent speed bump. It was really just staying out of trouble on the general-contractor side.

Even though there’s tons of demand for new data-center work, and that work has come with relatively attractive margins for the private and public competitors doing it, the hyperscalers and neoclouds are more focused on quality and speed than absolute cost. That’s not to say they’re throwing money at every problem or that they aren’t looking at what things cost, but they really care about quality and speed, so the margins have been fine.

4. The air pocket: tariffs, Medicaid cuts, and paused projects

I think Limbach was singularly focused on avoiding GC work and transitioning the business to ODR, and they missed a big trend in hindsight. They focused exclusively on the owner-direct relationships and hit an air pocket on the owner-direct side. Demand slowed down.

I think it was a combination of trade-war- and tariff-related issues last year, the Build Back Better bill, which introduced Medicaid cuts to the healthcare vertical—a big vertical for Limbach—and then just the Israel-Iran war this year, higher oil prices, and general macro stuff. Discretionary projects were either put on pause or temporarily put on hold, and they hit an air pocket in demand.

That air pocket translated into an organic revenue decline of low to mid-single digits in the first half of this year, while EBITDA was down much more than revenue. Revenue was down approximately 5%, while EBITDA was down 30% in the first half of this year, year over year.

A big chunk of that decline in EBITDA margin was fixed-cost deleveraging. There’s a fixed-cost base here, and if you get rid of those fixed costs, they’re hard to bring back. The company viewed this slowdown as temporary, so they didn’t want to take an ax to costs. That led to massive deleveraging on the fixed-cost side and EBITDA being down 30% year over year.

The stock was not particularly expensive going into the first half of this year. But since the company reported EBITDA down 30% in the first half, the stock is down probably 50%, following the second-quarter results, when they took guidance down from $90 million of EBITDA for the year to $80 million of EBITDA for the year.

So we’re looking at a low-double-digit reduction in EBITDA guidance for the year, with the stock down 50%.

5. Why the stock is down 50% when EBITDA is down 30

Now, why is a stock down 50%? If the company chose not to guide annually and just reported EBITDA down 35% or 30%, or whatever it was, for the first half, I think you could fairly say the stock should be down 30%. There’s no real leverage here. The enterprise value is effectively the market cap.

So why is the stock down 50% and not 30%? I think the stock is down 50% because of the way they guided the back half. Being down 30% in the first half and up 20% in the second half year over year seems unrealistic. For public market investors, it’s very hard to own a stock where you think they might miss or guide down again. It seems like they didn’t guide down enough—from 90 to 80. 80 still seems unrealistic, and there’s no valuation support for a stock where people think the numbers are going to keep coming down and the company is going to keep missing.

So I think that’s why the stock was down 50%. If there had been no guidance for the back half, I think the stock would probably be down 30%. Given that the guidance seems unrealistic, I think the stock is down 50%.

I think it’s the wrong reaction because I actually think the guidance is achievable for the full year. Even if they happen to miss, I don’t think it will be by much. I think next year is set up for a pretty good growth year, so I think the consolidation, capital allocation, and capital deployment opportunity is still there.

Pre-Q2 earnings, before this blowup, you were buying it at a reasonable valuation with the thesis that this is an organic growth story over time, plus capital allocation can generate pretty good IRRs here. I think you’re buying it at a valuation where you don’t even need to bet on capital allocation creating value from here. I think it’s too cheap for the business that exists today under the umbrella, and you’re basically buying the business for a steep discount to its fair market price, with the opportunity to also deploy capital and create value that way.

So I think you could benefit from multiple expansion on the base business from here, plus value creation from capital allocation. There’s also a cherry on top: They’re now finally starting to go after the data center business. If they do go after the data center business and get it, which I think they will, you can get multiple expansion from the core business, additional multiple expansion from having increased data center exposure, and value creation from M&A.

6. Organic versus headline revenue and the Pioneer Power deal

I think you could get a triple whammy here of highly asymmetric upside returns over a pretty short duration if things go as I expect. If not, I think you have valuation support on the downside. So I’ll stop there, and I’m sure you have lots of questions.

That was a fantastic overview. Let me ask a clarifying question, and then I’ve got a bunch of questions. You mentioned first-half revenue being down and EBITDA being down a lot more. When I was preparing, I saw that headline revenue was up, and I just want to bridge that because I think it will impact a lot of the questions. What happened is they made an acquisition, so organic revenue is down, but headline revenue is up. You can correct me if I’m wrong.

Yeah, they bought a company called Pioneer Power, which led to headline revenue being up.

7. Double dipping on a stock you already made money on

Perfect. Let me start with an actually non-Limbach-specific question. This is a double dip for you, right? You bought it a few years ago, rode it up, and I think you pretty much exited most of it, whatever it was. Now the stock came back, and you basically pulled back in.

I’ve found that the stocks I’ve done the best and worst on historically have been stocks where I double-dip. The stock does well, I buy it, I sell it, it comes back down, and I buy it again. Sometimes I do the best because I know the name really well. Then sometimes I do the worst because if the stock goes from 50 to 100 and back to 50, sometimes there’s a new risk that has crept in between 100 and 50 on the way back down. When I come in with my first-time-around lens, that risk wasn’t visible, or it was small, and that risk has gotten a lot bigger now.

I’m kind of dismissive of it because I say, “Oh, I know this. I’ve addressed it.” I haven’t updated my mental model or my understanding of the business, and I’m taking on a risk that I maybe don’t fully appreciate. That’s come back to bite me a few times. So I guess my first question would be: What gives you the confidence here that this is more like the first scenario than the second? Obviously, I’ve got lots of questions on the business, but that was just a high-level thought I wanted to ask.

The first time I bought it, the thesis was margin expansion, multiple expansion, and capital allocation. We’re back at the thesis; it’s basically the same. The multiple today is a little bit higher than the first time we spoke about it. Margins are reasonably higher, but it’s a really good balance sheet. The end market is on fire. Its private-market competitors and public peers are seeing massive amounts of demand, organic growth, and margin expansion.

This is not a melting-ice-cube end market. There’s going to be a need for this service for decades to come. So we have really good valuation support, a really clean balance sheet, and an end market that’s on fire. Limbach has labor that’s in high demand and short supply right now.

I think there are explainable reasons for why revenue was down in the first half. They had really good bookings over the last 3 quarters. Those bookings were slow to burn, and that caught them off guard, but I think they have pretty good visibility into those bookings burning in the back half. I think there are reasons to be really optimistic that they’re going to win data center business as well.

I think the pipeline is in pretty good shape. If you speak to private and public companies, there’s lots of business to go around. The really big players, especially on the fabrication side, are capacity-constrained right now. Limbach has a lot of excess capacity on the fabrication side, and they could benefit from that.

I do think there are lots of reasons to believe that their current core end markets—healthcare, et cetera—have normalized and are going to return to growth. I think there are lots of reasons to believe they’ll capitalize on the data center business. If they don’t return to growth in their core verticals and/or capitalize on data centers, I think there are probably some costs to cut, and you can get margin back that way.

I think there’s a base level of EBITDA here that is extremely supportive of the current enterprise value, and that provides downside protection. If you can generate a base level of EBITDA that justifies today’s market cap, at a minimum, in almost any environment you could imagine, I think it’s hard to really get blown up.

I’m not saying that if they took EBITDA guidance for the year down from 90 to 80 and then came out and printed 70 or 65, the stock wouldn’t go lower. The stock would go lower for sure. But I still think that at 65, there’s probably upside, not downside. If you’re looking at 65 of EBITDA, less 5 of stock comp, less 5 of capex, you’re still at 55 of pretax earnings, and you’re looking at 45 of free cash flow. That’s 4 bucks a share, and you’re trading at 10 times that number today with a very clean balance sheet.

It’s worth more than 10 times earnings, even after you take a massive haircut to EBITDA. So if they print 65 instead of 80, it would be a disaster for the stock in the near term, but I think you have a really good margin of safety because even in that scenario, I think you could underwrite upside from that scenario, not downside from the current share price.

8. The bear case: low margin bookings and general contracting by another name

That goes nicely into what I think is the main question a lot of people have. Late last year, there were a lot of bears. There was a short report on VIC that I thought was very good, and there were a few other short reports floating around.

A lot of the bears and people looking at the stock say, “Hey, what happened here is there was an air pocket in orders in the summer of 2025, as you alluded to—tariffs, healthcare, and all this sort of stuff.” Management panicked and took on a lot of new bookings that were extremely low margin, and what you’re seeing now is all those bookings burning through.

They guide for the year—let’s just call it 750, which is the midpoint of the guide. They actually take that up to about 780 when they guide for the full year in Q2, but they’re taking EBITDA down. So all the bears and people who are worried are saying, “Hey, these guys are bidding on really low-margin business, and it’s destroying them.” They’re worried that management doesn’t have a handle on just how low-margin or how aggressive they were.

The second corollary to that would be: Even once you burn off this low-margin book of business, you’ve now got a management team that has proven they will bid for low-margin business, or they don’t realize that it’s low-margin business, which is an even bigger concern.

I think people are worried that this is a great business—ODR is awesome, owning the relationship—but they’re worried it’s general contracting under another name. We can talk about labor inflation and everything else, but I think that’s the real high-level worry people are getting at here. I tossed a lot out there, so I’d love to hear what you’re thinking about that.

9. Yaron Naymark, back for round six

Look, general contracting in another name sounds bad if you're talking about Limbach, but you look at other general contracting stocks right now, and they're trading at 10 to 25 times EBITDA because of the data-center tailwind. So, even if this is a general contracting name, and it becomes a general contracting name because it wins a bunch of data-center work, I think there's a case to make that there's upside for the stock.

I would be more concerned about the bookings they took on over the last few quarters if we saw, in the first half of this year, revenue up and margins down substantially. What we saw was revenue down organically, right? There's a big fixed-cost base and a big deleveraging. You don't cut costs immediately when revenue declines for a couple of quarters if you really think it's coming back, because it's going to be hard to layer the costs back in to grow.

If you think this is a growing end market, you don't just cut a massive amount of costs after 1 or 2 quarters of a slowdown. So, organic revenue down 6% and EBITDA down 30% is explainable to me based on deleveraging, and you're layering in Pioneer Power, which was the acquisition. That's why they grew revenue on a headline basis, which is a much lower-margin business than the core was, and they plan to get margins up there over time.

In the back half, margins are expected to be fine, and that's because revenue is expected to grow organically because they're going to increase the burn. We'll see. I still think gross margins will probably be down year-over-year, but you're going to leverage SG&A, and so EBITDA margins should be pretty good. We'll see what happens to gross margins in the back half.

I think the bear case—the short write-up—was good. What I missed, and what other longs probably missed, was that as the business was transitioning toward more owner-direct business, we became probably a little overly dismissive of weak bookings. My view was that they had more intra-quarter, short-duration business that they were winning and burning that never showed up in the backlog or bookings intra-quarter. So, I was less concerned about that than the bears were. The bears turned out to be right over the short term.

I still think, on a long-term basis, there's a lot of value to be created here via organic growth. I really do believe this was an air pocket in demand that's not durable or sustainable for the business. The important thing is that they have a good balance sheet. They're not in distress. They're going to grow their way out of this and deploy their capital in an efficient manner.

One point I'll make is that Mike, who's the CEO, has never made a lot of cash compensation, right? He worked his way up this company to eventually become COO and eventually become CEO. At one point, when the stock was $150, the guy was worth like $40 million on paper. He never sold a single share.

When you ask him why, it's because he told you that—and he told me back then, and he tells me today—he's a true believer in the long-term value-creation opportunity here, and he's in it for the long run. The guy didn't sell a single share, so he's a believer. I do believe in the long-term value-creation opportunity here as well.

It doesn't mean there won't be bumps along the way. It doesn't mean they won't make mistakes, which they did by being overly focused on the ODR side and avoiding all the data-center stuff. There are lots of public and private companies, like I said, that are taking on a lot of data-center work at really good margins. A lot of MEPs have 30% of their business in data centers now—40%, 50%, 60%. We effectively have zero.

If we get our fair share of data-center work, that implies substantial growth from these levels with really good operating leverage. You could be looking at $100 million-plus of EBITDA next year, or $120 million of EBITDA on an organic basis. Plus, you layer on acquisitions, and I think there's massive upside if those scenarios play out. I don't think there's a lot of downside fundamentally if those scenarios don't play out.

10. Why FIX and EME ran and Limbach did not

Let's talk about data centers for a second, because my first note when I was ramping up and prepping for this podcast was, “I don't understand why this business isn't firing on all cylinders,” right? I got the numbers somewhere, but over the past 3 years, FIX is up 800%, EME is up 250%, and Limbach is up 16%. It's even starker on a 1-year basis, and I didn't realize that they had no data-center business.

My first question would be: shouldn't a rising tide lift all boats? If FIX and EME are just doing all data centers, Limbach doesn't have the data-center business, but a lot of their competitors are going to the data centers. Shouldn't it just be that there's more demand? We're still doing health care. We're not getting the crazy amounts that data centers are getting, but we're the only ones bidding on this health-care work because everyone's focused on data centers. That seems reasonable to me.

My second corollary relates to the bear case we put out. They did just seemingly get a lot of low-margin business that's kind of burning off, but if they're going whole hog after this data-center business, is there any concern that this management team just did a lot of low-margin business in response to low bookings? If they're going whole hog after data centers, can we really trust that it's going to be at really good economic levels as they take share from FIX or EME, or whoever they want to take share from?

A couple of questions in there. If I miss some of the answers, refocus me. A rising tide should lift all boats that are playing that tide. If you're benefiting and getting data-center work, yes, the rising tide helps you. If you're not getting data-center work, the demand from the data centers is pushing labor and material costs higher and making things more inflationary in nature.

11. Wage inflation, technicians, and whether owner direct contracts trap them

If you have higher labor costs without the pricing power or the demand uplift that comes from the data-center work, your core customer is getting squeezed. They're seeing prices go up massively, and they're pushing back on you over price. You have inflationary costs on your income statement and less pricing power with your end customer, which isn't seeing the demand that the data-center customers are seeing. That actually hurts you.

That is one thing I thought about when ODR—which, as you said, is where you build a relationship with the building owner. I wondered whether ODR actually hurt them.

There’s so much demand for HVAC, which is a very popular area, and all these companies are making huge amounts of money. You hear about people making $150,000 a year as air-conditioning technicians. I wonder if ODR actually hurt them because all their technicians were saying, “We're going to make $20 more per hour working on a data center unless you increase our pay.”

Then Limbach is sitting there with massive wage inflation, relationships with these owners, and basically long-term contracts with these owners, saying, “We can't pass any of this through.” So, they kind of get the double dip there.

Yeah, it's wages and materials. Operating expenses are also ticking up. I do think you could make it up with volume and with work where the data-center work is, I think, equal to or higher margin than the other stuff. If you can get 10% or 15% organic growth, you can offset a lot of inflationary pressures because there are fixed costs to leverage, for sure.

But if you're seeing revenue decline 6% year-over-year, that's where the inflationary pressures really eat up your margin. If you believe the current revenue run rate from the first half was the true run rate of the business, I do believe there are costs that would be taken out to protect margin a little bit. I don't think EBITDA would have been down 35% if you believed that this wasn't temporary and was permanent. But I don't think they believe that, and I don't believe that.

As for the margin, you repeated something that the shorts are asserting, which I'm not certain of. You're saying the bookings they took on were knowingly lower margin. We know gross margins were down, but the company has attributed a majority of the reduction in gross margins to Pioneer Power being reflected in the consolidated results, having fewer project write-ups from projects that were ending in this period than last year, and then a big fixed-cost deleveraging.

I think the combination of those things explains a majority of the gross-margin reduction. We'll see what happens to gross margins in the back half, but the company is definitely guiding to significant gross-margin expansion in the second half versus the first half. If they do that, I think that calls into question whether the new business they're taking on is really at a known lower margin than the prior business. I'm not sure of that.

12. Did management get caught off guard between Q1 and Q2?

That sounds great. Let me just ask again. I think some of this is how you feel about management. I went and read the Q1 and Q2 calls and flipped through the Q4 2025 call. Do you think the company was surprised by the results—by how bad it got in Q2?

In Q1, they reaffirmed guidance, and when I read that call, they're talking as if Q1 was a blip, everything was under control, and Pioneer was coming in better. In Q2, they slashed the guidance, and you go read the call and they say 2026 is a reset year. They're going into next year and making the adjustments, and that's just a difference of 3 months.

Do you think they were surprised? Does that give you any worries that maybe they don't have their hands on how big a problem this was or is?

Yes, I do think they were surprised.

In fact, on the Q1 call, they said something like, “We’re comfortable with Q2 consensus estimates,” which is probably what got me and other longs in trouble. I did own the stock going into the Q2 blowup. I didn’t just reinitiate after it was down 50%; I have added to the position substantially in the last few weeks.

I think the fact that they said they were comfortable with Q2 made it seem like Q1 really was a blip and that they were expecting a strong recovery into Q2, followed by an even stronger recovery in the back half, which is typical. The business is typically second-half weighted. This year, it’s much more second-half weighted than in prior years. It seemed much more realistic to be able to hit $90 million of EBITDA for the year when they said they were comfortable with the Q2 numbers.

I think they were surprised by the slow burn. They had bookings that went into backlog, and they expected that backlog to burn at normal burn rates, but customers were dragging their feet, some voluntarily and some involuntarily. The voluntary side is, “Hey, macro, more tariffs, potentially war. Let’s put a pause on this project.” Involuntarily, it’s, “Hey, we really want to do this work, but we’re having a hard time sourcing electricians for the electrical component of this job, so we can’t do the mechanical component until we sort that out.”

I think the burn rates were below what they were expecting. I think they have really scrubbed the numbers, and it seems to me like they really believe the burn rates are going to pick up in the back half. I’m guessing they probably have decent visibility into Q3. When projects have started already, you probably have more visibility into that than into projects that haven’t started yet for Q4. It remains to be seen, but from talking to other competitors, both public and private, it seems like they’ve all seen similar trends in the non-data-center side of their businesses over the last 6 to 9 months.

It seems like things are starting to normalize, and so there’s reason to believe that the burn rates will pick up. The company will hit the back half. If they hit the back half, that looks like the real run rate of the business, not the first half, and we’re right back to where we were before the blowup.

And even better yet, if that happens and they win $100 million or $200 million of data-center business for next year, then all of a sudden this becomes a data-center play again, with massive operating leverage and organic growth, plus the capital-allocation story. This goes right back to, or even well above, where it was right before the blowup. There are scenarios where the stock doubles or triples over 6 or 9 months. There’s also a scenario where they blow up again and the stock’s down, but even if it’s down from here, I don’t think you’re permanently impaired. I think there’s reason to be hopeful from that level.

13. The $50m buyback nobody has touched

You mentioned capital allocation briefly in that answer. The company came out with a $50 million share buyback in December 2025, I think, and they haven’t executed anything on that so far. Obviously, you think the shares are attractive. Do you think they’re executing on that now, with an unlevered balance sheet, or do you think they’re waiting for full stabilization before they go for that?

Yeah, I don’t think they’re executing on it. I know why you ask. Every company should have a buyback and a shelf in place. Every public company should have an ATM ready to go and a buyback ready to go.

All these meme stocks that didn’t have ATMs, and their stocks are screaming, “We don’t know how to issue shares.” How? It takes $100 to file this thing. How did you not have this ready to go?

Right. But when you’re in a consolidating end market and you can buy stuff at 5 or 6 times EBITDA with no capex, even if you’re only trading at 6 times EBITDA right now, which Limbach is, there’s not that much value creation on day 1 because you don’t have the spread between what you’re paying at 6 and what you’re worth at 10.

But it diversifies you. It gives you more scale, more operating leverage, and more diversification. More scale traditionally comes with a lower cost of capital and a more predictable business. I think there are reasons why buying stuff at 6 times potentially is a more attractive use of cash than buying your stock back at 6 times.

I think they’re focused on M&A, so I would be surprised if they’re buying back stock. I think they’re focused on acquisitions. I do think the platform is worth significantly more than 6 times. Even though it’s not trading there today, you are creating future value for whenever you eventually get rerated back to 8, 10, 12, or 15 times EBITDA. I think acquisitions are a better use of cash than buying back stock, even at these levels. If they were trading at 2 times EBITDA, I think the math obviously changes on that.

For an MEP, they’re large. Their current scale is $750 million to $800 million in revenue. Comfort Systems is at $11 billion or $12 billion of revenue. EMCOR is tens of billions as well. There are private companies I’ve spoken to that are at $5 billion to $8 billion of revenue. They’re still pretty small. It’s a consolidating end market, so there’s lots of room to get bigger through M&A.

I think it smooths out your revenue, gives you more operating leverage on your fixed costs, and lowers your cost of capital. So, I think buying stuff makes more sense right now.

That was an awesome answer. No, because my first thought was, “Oh, they did something in December, and then earnings miss, earnings miss, earnings miss.” I think 2 of the 3 worst days the stock’s ever had were the Q1 and Q2 earnings days this year. The stock was down 30%.

I was reading a prior call to prepare for this, and one of the things somebody was saying—the stock was actually higher than this—was, “Hey, I like this stock because what you get at the end is that construction isn’t going away, right? So you have enduring recurring revenue. If you have those owner relationships, you’re hoping that’s kind of recurring revenue. The building is there; they’re going to need somebody. You have enduring recurring revenue.”

14. The math behind a $200 three year price target

As you mentioned, it’s a $700 million revenue business, and its peers are $5 billion to $10 billion. You’ve got a huge M&A engine. They said, “I like that for a compounding business.” I think one of your letters talked about a $200, 3-year price target. Can you walk me through the math to get to $200 for an enduring recurring-revenue business?

Yeah. I thought at that time, and I still think currently, that you can get to $10 a share of free cash flow by 2030 through some organic growth and layering on acquisitions. If that trades for 20 times $10, there’s your $200. That’s basically the math.

Okay. Obviously, the stock’s at $40 today.

Yeah. You could argue that the business is worth 15, not 20. You could argue the business is worth 25, not 20. But I think 20 is a reasonable multiple for a very clean balance sheet in an end market that’s not going away over time and that’s benefiting from the data-center buildout tailwinds that all their competitors are seeing.

As I said, the peers are trading for 10 to 25 times EBITDA. Comfort is a nonunion shop with much more scale and better margins. That’s on the high end, at 20-plus times EBITDA. EMCOR is at 15. You have Legence, which is newly public—Blackstone brought it public—at around 13 times EBITDA. There are lots of smaller and midsize players at 12 to 15 times EBITDA. I don’t think it’s crazy for Limbach to get there.

15. Could Limbach be the seller instead of the buyer?

What about the other way? We mentioned that it’s a consolidating industry. If you’re Comfort or EMCOR, don’t you have to look at your multiple and look at Limbach’s multiple and say, “Hey, we buy them, we get some fabrication. We’re already in data centers; we get a lot of capacity that we can shift into our big data-center business. We get the multiple arbitrage that everybody likes.”

There are obviously synergies there. What about going the reverse way and Limbach selling? Do you think there’s anything to that? You can also say, “Hey, I know the people here. You mentioned the management team didn’t sell a share when the stock was higher. They’re true believers. They want to go attack this upside here.”

There are definitely reasons to argue for Limbach getting larger through acquisitions and creating value that way. For that to be realistic, they have to execute on the core business, right? You can’t be struggling to grow in an end market where all your peers are growing, especially for a company this size, and have there be a real public-market story.

The underlying business has to execute, and execution just needs to mean low-single-digit organic growth with flat-to-growing margins. Not on the gross-margin side, but by leveraging SG&A. If you can do that and deploy capital well, I think this is an amazing public-market story. There’s no need to sell the company.

If they continue having execution issues, I do think there’s reason to believe that this should be consolidated into a larger player. There are a bunch of private companies, like I said, that are much larger. There are a few public companies this would make sense for, I think. I don’t think Comfort is one of those. I do think EMCOR could be a consolidator. I do think Legence realistically could be.

Those are both union shops. Limbach is a union shop as well. Comfort Systems is not; it’s a merit shop. They have almost no union employees. I think they probably have 5 union employees in the entire company or something like that.

And so I don’t think Comfort would do that. But I do think EMCOR, over a decade ago at this point, probably kicked the tires on Limbach and didn’t do anything. Is there a shot they do something again? Yes. If you put a for-sale sign up, for sure.

I think it’s hard to do non-friendly takeovers in a business where all your talent kind of walks out the door every day. But I do think if you put a for-sale sign up, there would be lots of buyers here at a premium to the current share price, for sure.

Okay, last question, then we can maybe talk about other stuff.

And, by the way, there are public-company costs as well, right? So if they do $80 million of EBITDA, you’re really bidding off of $90 million or $95 million. You’re not bidding off of $80 million at that point.

Yeah. And a higher multiple to the acquirer.

16. Sponsor: Trata

I’ve noted Josh Horowitz is the chairman here, whom I’ve met maybe twice. He’s a fellow small-value investor, but it’s not lost on me that I think this is his 3rd chairmanship, and the first one was BDMS, which sold to private equity for, if I remember correctly, a massive premium. Another board he was on sold, and another board he’s on, BKTI, is like the best-performing small cap of the past year or 18 months or something.

So he owns a decent bit of stock here. I do have to think he’s the chairman, and he’s probably driving a lot of the shots. Mike, the CEO, even after this downturn, owns a lot of stock. So I’d have to think everybody looks at this, and if they really aren’t believers or they think the story might be marred, look at that.

Last thing, and then we can talk about anything else for 5 or 10 minutes if you want. You know, I do remember the first podcast. My whole thing was, “Yaron, this is a former SPAC, and all former SPACs just blow up.”

Now, this was de-SPAC’d in 2016, right? And all the people from the de-SPAC are effectively gone at this point. But does it worry you in the back of your mind? Like, “Oh, man, it’s still a SPAC from 10 years ago, and all SPACs—there’s just this gravitational pull toward $10 per share. $10 per share is always the de-SPAC price.” Is that gravitational pull still there 10 years later? Have you escaped gravity’s field, or is that—

You have the occasional winners. You have Restaurant Brands, right? QSR, Burger King came public via a SPAC. You have APi Group, which was done through a SPAC, and Martin Franklin’s SPAC.

I think there are some SPAC winners. I think there’s a lot of SPAC trash, but I think this one bucks the trend. Like I said, it’s an end market that’s not going anywhere. It’s not a melting-ice-cube end market. They’re not the No. 1, No. 2, or No. 3 player in the space, but it’s a rapidly consolidating end market, and they could be a consolidator or a consolidatee.

I think we’re buying it at a valuation with a very wide margin of safety because the multiple is very low. There are levers to pull to cut costs if this is the actual run rate of the business, and I think there are reasons to be optimistic that they’ll win data-center business over time as well.

No, it makes absolute total sense. I just laugh because every now and then I’ll see something that de-SPAC’d 8 years ago, and they’ll report poor earnings, and the stock will go from $18 to $10, and I’ll just laugh. I like the inevitable lifecycle: everything that’s a de-SPAC eventually goes back to $10.

Now, this went—if you think about it this way, if I remember correctly, it de-SPAC’d in 2016. By 2019, I think it hit $4 per share and then began to run. So maybe it’s already done the de-SPAC. It’s too far away, but it’s just something I thought about.

Absolutely. It had a lot of blowups along the way, for sure.

Anything else in your mind?

17. CYMCOR and the data center pull through

They bought a company called Simcore.

Alongside their Q2 earnings. Yep.

Sorry, what did you say?

Alongside their Q2 earnings, they announced that. Yep.

Yep.

It’s a program-management business that focuses on data centers. They’ve done program management in the healthcare vertical, and the program-management business by itself isn’t that big. They basically advise people who are building data centers and charge a fee to help manage the project and make sure it’s done on time and under budget and the like.

They’re expecting $4 million of EBITDA from it. They paid $30 million, so it’s a higher multiple than the MEP businesses they’re typically buying. The interesting thing is that normally they see significant pull-through work from the program-management business. So you advise the builder of the data center, and that gives you a foot in the door to bid on the work that you’re advising them on.

If they see similar pull-through from Simcore to what they’ve seen in the healthcare program-management business, I think it’s like a 20× pull-through multiple is what they’ve seen historically. If they see that kind of pull-through here, you’re looking at a few hundred million dollars of data-center revenue, which will put you at about 25% or 20% of the business in data centers. That’s on the lower end of what you hear their peers get, plus the non-pull-through work that they’re just bidding on through ordinary-course business.

So you really could see their data-center business go from $0 to hundreds of millions of dollars potentially. That’s a dream case, but it’s possible. It’s not completely unrealistic. If they do that, there’s massive growth ahead here.

And if they don’t do that, I still think you have downside support in the form of valuation protection, markets that are stabilizing and coming back, costs to cut, strategic buyers if none of that takes place, a clean balance sheet, and the ability to do acquisitions at attractive multiples. So there are lots of ways to win here, and I think it’s a really good risk-reward.

18. Investing around AI: Limbach, IWG, KKR, and the mega-alts

Let me switch topics completely. I have 2 questions on AI for you, not really related to Limbach, just in general. I know your portfolio. You and I have talked every now and then about companies, and I’ve seen your letters. As somebody who invests in largely AI physical world businesses—you’ve been on the podcast twice for IWG, and this is your 2nd time on Limbach. We had another one that is a very physical business that I will not mention, but a very real business, and I see your letters—how are you viewing the world and the state of investing outside of AI?

Ignoring the existential dread of, “Oh, I didn’t buy”—you and I are on a thread where we joked we should have just bought the 2× leveraged Micron ETF—but ignoring the “Hey, I missed the trade,” how are you viewing the world when you’re investing in the non-AI businesses these days?

Yeah, I’m trying to avoid businesses that are obviously going to be negatively impacted by AI and might go away over time because of AI. I’m trying to buy businesses that will benefit over time from AI, but not in a rapidly changing business model or end market that’s hard to predict, right? Things that have obsolescence risk. I’ve always tried avoiding things that are rapidly changing and hard to think about what the business might look like 5 to 10 years out.

I’m avoiding those businesses, and I’m trying to buy businesses that are going to either be AI-neutral or AI winners, but that are not currently being valued like AI winners or AI-neutral businesses over time. Two or 3 obvious examples of them in the portfolio right now: Limbach is one.

I think its peers that are benefiting from AI data-center build-outs are trading at much higher multiples and are seeing really good organic growth. And so you could get the faster growth and the higher multiple—the double whammy here—plus capital allocation and all the likes. That’s a potential AI beneficiary that’s not being valued like it right now, and I think it’s possible they get that.

I own IWG; we’ve spoken about it on the pod a few times now. I think that’s being viewed as an AI loser, right? All office jobs are going away, and if office jobs go away, there’s no need for office space. I think it’ll be an AI beneficiary—not immediately, but over time—as the workforce becomes more productive through the use of AI. Companies might want to shrink or flatten out their head count.

In a world where you’re no longer growing your head count over time and maybe even reducing it, it’s hard to sign a 10-year lease if you don’t have visibility into what your footprint’s going to look like in 10 years. Today, a low single-digit percentage of office space is utilized on a short-term rental basis. I think that’s going to move to a much higher percentage over time, and IWG is not viewed as an AI winner right now. I think it will be.

And then KKR, which I reinitiated this year, obviously has a portfolio of businesses that it owns and that it has lent to over time. The markets have been nervous about the AI exposure of the software companies, private-equity firms, and private-credit firms in those portfolios.

I reinitiated the position with the view that I think the existing portfolios are what they are, right? People understand that asset managers will be hurt by some of the things that they bought before AI was a thing. And I think the firms that are best positioned to survive that are the ones with the longest track records and the most blue-chip names that are likely going to be given a pass for a bad vintage or 2 because they have 10 vintages before that that did very well.

They have so much operating history as good investors that I think they will continue to be durable.

While smaller mid-market firms that have fewer vintages might be given less rope to work with for making bad investments, I think you're going to see a consolidation of mid-market firms, with some going away. It's going to continue to push more and more toward either new startups that didn't get hurt by the AI stuff or the incumbents—the blue-chip, mega-alts. I think mega-alts are going to be beneficiaries of taking share within private equity and alternatives, but also taking share from passive in a world where business and the economy are rapidly evolving because of AI.

You could make the case that owning passive gets harder, right? Do you really want to own all the businesses that are AI losers? Don't you want active managers to select for you the businesses that could really do well based on making investments in AI and be AI winners? There are lots of other reasons I think it's interesting, too, but I think the mega-alts are going to be AI winners long term. So, that's 3 ways it manifests in the portfolio today that I could think of offhand. I'm trying to avoid the melting ice cubes.

You said a lot of interesting stuff. I'll just riff off the last 2 things you said about the mega-alts. I think it's very interesting: one thing with AI I think is going to be huge is proprietary data. Now, data is the new oil. People were saying that 10 years ago, so maybe there's nothing new, but they have extremely sophisticated, extremely unique data from decades of deals, diligence, owning companies, and all that sort of stuff.

I could imagine a world where AI—if you and I tomorrow were like, “Hey, forget being a burgeoning media empire, Andrew. Forget living in Miami and living the good life. Let's go start a private-equity shop”—A, that would be very hard, but B, if we're competing and KKR bids on something, they've got decades of data that AI has scraped, and we do not. I guess they have huge advantages there, huge advantages in talent, all that sort of stuff. So that's 1.

And then, 2, on the active manager, that's really interesting. That's been the argument for years against passive, right? It owns everything, so it owns a bunch of the junk, but it's a very, very difficult bogey to beat. It is interesting to think: Does it make it easier or harder for active managers to outperform because they can avoid, quote unquote, the junk, versus maybe some of the junk is the benefit of owning passive?

There are so many verticals that there's massive growth ahead for the mega-alts specifically. The high-net-worth retail channel is just starting to take off; that could be a massive opportunity for them. KKR has the largest Asian alternatives business globally, but institutions have a very low allocation to alternatives in Asia today relative to the U.S., where lots of institutions are 25%, 30%, 40%, 50% allocated to alts and privates. In Asia, you're looking at probably a mid- to high-single-digit percentage of institutional capital allocated to alts. So there's massive growth ahead there; KKR will benefit from that as the largest Asian alternative asset manager.

Europe is similarly underpenetrated—not as much as Asia, but below the U.S. They have a big European business. And there's a lot of growth ahead in the U.S. in credit, infrastructure, and real estate for KKR specifically to catch up to the Blackstones and Brookfields of the world in those strategies. Even their most legacy, most mature U.S. private-equity business is still growing at a nice clip. So, lots of growth ahead from lots of different avenues.

The private-credit scare gave me an opportunity to reinitiate a position in a business that I sold a couple of years ago at an attractive price. But those are the kinds of names that are going to be here in 5 years, 10 years, 20 years that I think will be either neutral or AI winners from AI, at compelling valuations with good balance sheets.

Perfect. Yeah.

Well, let's wrap it up there. Yaron Naymark, 1 Main Capital. Thanks so much for coming on. Thanks for wearing the shirt, representing the brand, and I'm looking forward to having you on again soon.

Thanks, man.

Bye, buddy.

Bye.