How to Analyze Industrial Contractor Stocks: A Practical Framework

Last Updated: January 31, 2026

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What Are Infrastructure Contractors?

Infrastructure contractors build the physical systems inside buildings—everything from HVAC and electrical to plumbing and fire protection. The industry term for this work is MEP (Mechanical, Electrical, Plumbing).

Why should investors care?

Data centers are driving unprecedented demand for MEP contractors. A single hyperscale data center requires:

• Massive cooling systems (mechanical)
• Redundant power infrastructure (electrical)
• Sophisticated fire suppression (plumbing/safety)

Companies like Comfort Systems USA (FIX) and EMCOR Group (EME) are direct beneficiaries. But not all contractors are created equal—some generate 40% returns on capital while others struggle to earn 10%.

This guide explains how to tell the difference.

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The 5 Metrics That Matter

1. ROIC (Return on Invested Capital)

What it is: ROIC measures how efficiently a company uses capital (both debt and equity) to generate profits.

Formula: NOPAT ÷ Invested Capital

Why it matters for contractors: Capital-intensive businesses tie up cash in equipment, receivables, and project working capital. ROIC tells you whether that capital is being deployed effectively.

What consistency looks like in filings:

"We have generated positive free cash flow in each of the last 26 calendar years." — Comfort Systems USA 10-Q, Q3 2025

This signals a durable moat. Most companies highlight recent wins; FIX shows 26 years of discipline through booms and busts.

How to use it:

• Compare ROIC to the company's cost of capital (typically 8-12%)
• Track the 8-quarter trend—is ROIC improving or declining?
• Decompose ROIC into margin × turnover to understand why (see DuPont analysis)

Screen for high-ROIC contractors →

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2. Backlog & Book-to-Bill Ratio

What is backlog? The dollar value of contracted work that hasn't been completed yet. Think of it as a forward-looking revenue snapshot.

Unlike a sales pipeline (potential deals), backlog represents signed contracts. It's the most reliable indicator of near-term revenue.

What is book-to-bill? New orders received ÷ Revenue billed in the same period.

How to interpret:

Ratio	Signal	Action
Above 1.0	Orders exceeding completions	Demand growing
Equal to 1.0	Replacing work as completed	Stable
Below 1.0	Not replacing completed work	Potential slowdown

Warning sign: An excessively large backlog relative to capacity can signal:

• Aggressive bidding on low-margin projects
• Execution risk (taking on more than the company can deliver)
• Extended timelines that delay cash collection

Where to find it: SEC 10-Q/10-K filings in the Management Discussion & Analysis section. Companies may also disclose "Remaining Performance Obligations (RPO)" with visibility into 12-month conversion rates.

What strong backlog disclosure looks like:

"Our remaining performance obligations and backlog were $20.97 billion and $39.17 billion as of September 30, 2025, representing increases of 25.1% and 13.4% relative to December 31, 2024." — Quanta Services 10-Q, Q3 2025

Notice: They quantify both the level AND the growth rate. This transparency signals confidence.

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3. Operating Margin

What it is: Operating profit as a percentage of revenue.

Why it matters: Operating margin reveals whether a contractor is a "quality operator" or a commodity player competing on price.

What drives margin differences:

• Project mix - Data center work commands premium pricing vs. residential
• Labor efficiency - Skilled workforce reduces rework and delays
• Customer quality - Large tech customers pay faster and negotiate less

Watch for: Segment-level margins. A company can show stable overall margins while a key segment deteriorates. MasTec's Pipeline segment collapsed 530 basis points while Communications grew—the consolidated number masked the problem.

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4. Days Sales Outstanding (DSO)

What it is: Average number of days to collect payment after billing.

Formula: (Accounts Receivable ÷ Revenue) × Days in Period

Construction-specific context: DSO runs higher for contractors (60-90 days vs. 45-day average for all industries) because:

• Long project timelines
• Progress billing tied to milestones
• Retainage (clients hold back 5-10% until project completion)

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5. Cash Conversion

What it is: Operating Cash Flow (CFO) ÷ Net Income

Why it matters: Cash conversion validates whether accounting profits translate into actual cash. Contractors face significant working capital demands—receivables, work-in-progress, retainage. High cash conversion means profits are "real."

Benchmarks:

• Healthy: 80-120% (profits converting to cash)
• Concerning: 50-80% (profits partially consumed by working capital)
• Red flag: Below 50% (profits aren't real, or growth is eating cash)

What a cash flow warning looks like in filings:

"Net cash provided by operating activities was $173 million as compared to $650 million for the nine months ended September 30, 2025 and 2024, respectively, for a decrease in net cash provided by operating activities of approximately $477 million." — MasTec 10-Q, Q3 2025

Revenue grew 22%. Cash flow collapsed 73%. The filing buries this in routine language—but this is a critical warning sign.

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Worked Example: Comfort Systems USA (FIX)

Let's apply all five metrics to a real company:

Metric	FIX Value	Interpretation
ROIC	40.8%	Excellent (5x industry average)
Backlog	$9.38B (+65% YoY)	Strong demand, significant growth
Operating Margin	13.3%	Premium tier (top decile)
DSO	~55 days	Better than industry average
Cash Conversion	189.7%	Exceptional (profits exceeding cash generation)

Where does FIX disclose this data?

• ROIC: Calculated from income statement and balance sheet (MetricDuck computes this automatically)
• Backlog: SEC 10-Q, MD&A section: "Backlog was $9.38 billion as of September 30, 2025"
• Operating Margin: Income statement (Operating Income ÷ Revenue)
• DSO: Accounts Receivable from balance sheet, apply formula
• Cash Conversion: Cash Flow Statement (CFO ÷ Net Income)

For the complete peer comparison including EMCOR, Quanta, and MasTec, see MEP Contractor ROIC Rankings.

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Red Flags to Watch

When analyzing any contractor, watch for these warning signs:

1. Customer Concentration & Contract Risk

• If 50%+ of revenue comes from a few customers, that's dependency risk
• Example: Dycom (DY) derives 89.6% from top customers—extreme risk

"Generally, our customers are not contractually committed to specific volumes of services under our MSAs, and most of our contracts can be terminated on short notice even if we are not in default." — Quanta Services 10-Q, Risk Factors

Backlog looks solid—until you realize customers can walk away. Check risk factors for this language.

2. Declining Backlog

• Falling backlog without a clear explanation signals weakening demand
• Compare YoY trends, not just sequential quarters

3. Margin Compression in Core Segments

• Consolidated margins can mask segment deterioration
• Read segment-level disclosures in SEC filings

"The 40 basis point reduction in operating margin was attributable to lower profitability on certain projects in new geographies where we encountered reduced labor productivity." — EMCOR 10-Q, Q3 2025

Revenue grew 16%, but margins fell. This quote teaches you to separate one-time integration costs from structural problems.

4. Rising DSO Without Explanation

• If management doesn't address rising DSO, investigate further
• Often precedes cash flow problems

5. Cash Conversion Below 80%

• Sustained low cash conversion means profits aren't materializing
• Growth requiring more cash than it generates is unsustainable

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Start Your Own Analysis

Step 1: Identify contractors in the sector you're researching

• MetricDuck ROIC Screener (filter by Industrials sector)
• Company comparison tool

Step 2: Calculate or retrieve the 5 key metrics

• ROIC, Operating Margin, Cash Conversion from MetricDuck
• Backlog and DSO from SEC 10-Q/10-K filings

Step 3: Compare against benchmarks

• Use the tables in this guide as reference points
• Compare within peer groups, not across industries

Step 4: Check for red flags

• Customer concentration, margin trends, cash conversion

Step 5: Read the SEC filings directly

• MD&A section for management commentary
• Risk factors for disclosed concerns

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Methodology Note

This framework applies to infrastructure and MEP contractors—companies that install mechanical, electrical, and plumbing systems in commercial buildings. It may not apply directly to:

• Heavy civil construction (different margin profile)
• Homebuilders (land and inventory dynamics)
• Engineering firms (asset-light model)

For sector-specific ROIC benchmarks across all industries, see NYU Stern's industry data.

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Part of our ROIC Analysis series.