IESC is an electrical contractor that is interesting for a number of reasons. The stock has no analyst
coverage and no conference calls so it is totally under the radar. The short version of the long case is that
at its current price, IESC should generate about a 10% free cash-flow yield this year along with mid-single
digit organic growth driven by Texas residential real estate (over 50% of its residential exposure with Dallas
as its largest market) and its Communications business which services data centers. IESC also has the
benefit of making small acquisitions (sub $20MM) at low multiples (5-6X EBITDA) while trading at 10X
EBITDA. Those acquisitions then lead to more free cash-flow which is enhanced by IESC’s ~$425MM NOL. It
has a large controlling shareholder that is a talented capital allocator and is bound to the company because
of the NOL.
IESC is engaged in subcontracting electricians in the Residential, Communications and Commercial &
Industrial verticals. They also have an Infrastructure solutions business that is focused on maintenance and
repair for large electric motors and power generating equipment.
IESC is controlled by Jeffrey Gendell's Tontine Partners who owns 62% of IESC stock which represents 34%
of Tontine's fund (based on latest 13F). Tontine Partners was a very successful hedge fund in the late 1990s
until 2008. Up to that time, Tontine had $9 billion under management and 38% annual returns before
suffering significant losses during the crisis. After the crisis, tontine was left with a few very concentrated,
illiquid positions in companies like Patrick Industries (NYSE: PATK) where Tontine owned 56.5% of the
shares and about 58% of IESC.
IESC went public in 1998 and rapidly levered up to acquire commercial electrician businesses. The company
eventually ran into trouble in 2004, when they had some issues with the accounting for several large
percentage of completion projects, which combined with their extreme leverage led to restrictions from their
bonding agent culminating in a bankruptcy filing in February 2006.
Genedell held a significant percentage of IESC’s bonds which he exchanged into stock when the company
exited bankruptcy. This put Gendell in the position of owning a very large percentage of IESC’s stock and
left the company with a huge NOL. His large share of the float also helps explain the lack of analyst
coverage and undervaluation of IESC.
After the crisis, we believe that Gendell focused his efforts on PATK early on by implementing an acquisition
strategy that focused small companies with entrepreneurs that wanted to preserve their personnel and to
avoid potentially destroying their legacy by selling to private equity. They focused on owners of small
businesses that did not want to see huge headcount reductions or their company heavily levered. In return,
PATK requested a lower multiple. This strategy worked well as PATK’s stock rose more than 50X since 2011.
IESC Acquisition Strategy
Over that time Tontine sold its interest in PATK and we believe decided to use the same acquisition strategy
at IESC. IESC, only started to implement a similar acquisition strategy in May of 2015 with its purchase of
Southern Rewinding. Since then IESC has made four other acquisitions. IESC uses the same strategy where
they find smaller businesses controlled by entrepreneurs that have no clear succession plan within their
family. IESC commits to preserve the business but requires that the owner to sell based on its trailing
multiple of EBITDA. One interesting additional nuance associated with IESC’s acquisition strategy is the
necessity of bonding. Because IESC’s business requires bonding it is more difficult for acquirers to leverage
up. This limits completion from private equity when IESC is considering acquisition targets.
IESC has four segments:
IESC Residential: The principle driver for IESC Residential is new home starts. IESC’s largest segment is residential with Texas being over 50% of the segment’s business and Dallas as its largest single market. The biggest indicator for the segment is Single Family Housing Starts.
IESC Communications: The principle driver is data center spending and the growth of data transmission.
IESC Commercial: The priciple macro driver for Commerical and idustrial is comercial construction.
IESC Infrastructure Solutiions: the Principle driver is industrial production.
You can see evidence of the indicators effectiveness in the Segment results below: