A 40-bagger hiding in the electrical trade

Today, I'm digging into IES Holdings (IESC).

They're an electrical contractor. IES wires houses and apartment complexes, runs the cabling inside data centers, builds electrical systems for factories. They also fabricate and repairs heavy power gear like generator enclosures, bus duct, and motors.

A few things that stood out to me:

• Operating income went from $56M to $493M in four years (the definition of operating leverage!) . Revenue less than doubled over that stretch. Operating margin went from 2.6% to 12.4%, impressive for a contractor.

• Backlog hit $4.5B at the end of June, up 91% in a year. That's more than a full year of revenue already lined up, and $1.7B of it is signed letters of intent that haven't converted into contracts yet.

• One investor owns the majority of the company. Jeff Gendell's Tontine has held a controlling stake for years, and he ran it as chairman and then CEO while it grew from a penny-stock survivor to a $13.8B company.

But it's not all clean and perfect:

• The business that used to be the crown jewel, Residential, is shrinking. Revenue in that segment fell 6% last quarter and it earned just $6M of operating income in Q2. Residential still makes up 39% of their revenue so the current housing market weakness is quite a headwind.

• IES just closed its biggest deal ever: about $691M for DBM Global, a structural steel fabricator with roughly $1.5B of revenue. Most of it is cash, funded partly with new borrowings, so the no-debt balance sheet is gone for now. And steel erection is a different trade from wiring.

I tried to uncover what exactly Gendell did to turnaround IES. It appears to be driven by a few things:

1. Acquisitions. Starting in May 2015, Gendell repeated the approach he'd used at Patrick Industries. IES bought small, asset-light electrical businesses that were too small for private equity to bid on. Prices averaged about 6.6x EBITDA less capex, with roughly zero net debt. IES made about 25 acquisitions from 2013 to 2021, including MISCOR, Technibus, and Azimuth.

2. Tax Losses. IES had about $459M of federal net operating losses (NOLs, past losses that offset future taxable profits) at FY2014. In January 2013 it adopted an NOL rights plan, which blocks any ownership change big enough to wipe those losses out. The result was years of profits with little federal tax, which meant more cash for deals.

3. Good (lucky) timing. The 2021 housing boom and the data center buildout lifted every contractor (competitor Comfort Systems is up even more than IES this year). But to Gendell’s credit, he came into this market boom with a clean balance sheet, a tax shield, a pile of cheap niche businesses.

The other key takeaway here for me is that owning skilled labor in a scarce trade can be as valuable of an asset as something like a factory. Building world-class employee recruiting, training, and retention systems can be an under-appreciated differentiator.

I consider myself to be a so-so manager of people mostly due to the fact that I don't have as much structure as I should and simply expect people to do good work (without the proper systems). So IES is a good reminder for me to keep honing this skill.

With that, I’ll see you later this week.

Nick

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TL;DR

• IES is a Houston-area electrical contractor serving homebuilders, data centers, factories, and industrial customers across four segments.

• TTM revenue is $4.0B, up from $2.2B in FY2022. Operating income went from $56M to $493M over that same stretch.

• Backlog reached $4.5B at June 30, 2026 (up 91% YoY), driven by data center work in Communications and Commercial & Industrial.

• IES ended June with zero borrowings and $388M of cash and securities. On October 5 it closed the ~$691M DBM Global acquisition, paid with ~$545M of cash (partly borrowed) and ~$146M of stock.

• The stock is up 71.2% over the past year, well ahead of EMCOR (+23.3%) but trailing Comfort Systems USA (+120.7%). Over 10 years it's up about 40x.

• Operator lesson: capacity and trained crews are the product when your customers are racing a deadline.

The 30,000-Foot View

IES makes money by selling labor, engineering, and some manufactured product on a project basis. Most jobs are fixed-price or cost-plus contracts, so bidding accurately can be an ongoing differentiator as well as a risk.

Here's the FY2025 revenue mix (fiscal year ends September 30):

• Residential: $1.30B (39%). Electrical and low-voltage work for single-family builders and multi-family projects, mostly in the Sun Belt.

• Communications: $1.14B (34%). Structured cabling, networking, security, and AV, with data centers as the big driver.

• Infrastructure Solutions: $499M (15%). Custom power gear like bus duct and generator enclosures, plus motor and generator repair.

• Commercial & Industrial: $428M (13%). Electrical and mechanical construction for plants, hospitals, and now data centers.

That mix is changing fast……last quarter Communications did $453M (up 51%) and Commercial & Industrial did $241M (up 109%), while Residential did $324M (down 6%). Five years ago Residential was the growth engine. Today data centers are.

Key Stats

• Market cap: ~$13.8B

• TTM revenue: $4.0B

• TTM gross margin: 26.3%

• TTM net income: ~$456M

• 1Y total return: +71.2%

• Employees: ~10,262 at FY2025, plus ~4,000 from DBM Global

• Industry: Engineering & construction

Company History

• 1997: Integrated Electrical Services forms as a roll-up of independent electrical contractors, headquartered in Houston. 1998: IPOs in January.

• 2006: After years of integration problems and losses, the company files Chapter 11 and emerges the same year.

• Late 2000s: Jeff Gendell's Tontine Associates builds a controlling stake.

• 2016: Rebrands as IES Holdings. Gendell becomes chairman.

• 2020: Gendell takes over as CEO, and the company starts leaning harder into organic growth, capacity investment, and bolt-on acquisitions.

• FY2022 to FY2025: Revenue grows from $2.2B to $3.4B while operating margin goes from 2.6% to 11.4%. Communications revenue roughly doubles.

• 2025: Matt Simmes, previously COO, succeeds Gendell as CEO. Gendell stays on as executive chairman.

• 2026: Closes the $192M Gulf Island Fabrication acquisition in January, buys a Broadwind facility in Abilene, Texas for $19.5M, posts 40% revenue growth in Q3, and completes a 2-for-1 stock split on August 21. On October 5, closes its largest deal ever: the ~$691M acquisition of DBM Global (Schuff Steel, Banker Steel, and others) from INNOVATE Corp.

Show Me the Money

Standout financial features:

• Gross margin went from 14.7% in FY2022 to 26.3% TTM. That's almost 12 points of margin on a labor business. Some of that is mix (more data center work, more manufactured product), and some of it is IES pushing pricing.

• Q3 revenue grew 40% while operating income grew 60%. Every extra dollar of revenue is coming in at a higher margin than the average dollar.

• CapEx has exploded. It was $18M in FY2023 and is $143M TTM. Management is buying buildings, fabrication yards, and equipment ahead of demand, and says Gulf Island and Abilene are still underutilized.

• No debt, $388M of cash and marketable securities, and $358M of customer billings in excess of work done (FMP labels it deferred revenue) at June 30. That changed on October 5: DBM was funded with cash on hand plus borrowings on an expanded Wells Fargo credit facility, so expect real net debt on the next balance sheet.

Financial Data

TTM runs through June 30, 2026. Net debt includes lease obligations and excludes marketable securities ($311M at June 30).

Stock Performance

1-year head-to-head vs. peers:

The 10-year number is wild: $10,000 in IES in October 2016 is worth about $397,000 today. The stock is still 16% below its August high, though. The past year tells you the market sees IES and Comfort Systems as data center stories and EMCOR as a steadier, bigger contractor.

The N.O.O.B. Nine — Competitive Powers

The Nerd Out on Business Nine is made up of Hamliton Helmer's famous "7 Powers" of competitive advantage (Scale Economies, Network Economies, Counter-Positioning, Switching Costs, Branding, Cornered Resource, and Process Power) combined with two of my own (Data Flywheel and Distribution Advantage).

Average Score: 2.1/5 - a labor-and-capacity moat that holds as long as IES keeps winning the fight for skilled workers.

Memorable Marketing

IES spends almost nothing on marketing in the consumer sense. The sales motion is showing up on time with enough crews.

Notable tactics:

• Follow the customer (ongoing): Residential grew by trailing big Sun Belt builders into new markets. Communications does the same with data center operators, landing the next campus after finishing the last one.

• Quiet investor relations (2016 onward): No earnings calls for years, just press releases and filings. It keeps management focused on operations and filters for patient shareholders.

• Buying capacity as a sales pitch (2025 to 2026): The Gulf Island and Abilene purchases tell data center customers IES can scale fabrication with them.

• Training pipeline: Management keeps pointing to training new teams for data center work. The recruiting message is the marketing.

Tactical takeaways:

1. Land one great customer and follow them to every new site.

2. Buy capacity during a slow period, then sell it at a premium when demand shows up.

3. Talk less, deliver more. Consistent execution is its own advertisement.

4. Make recruiting part of the brand when labor is the bottleneck.

AI Uses & Opportunities

Current exposure:

• IES is an AI picks-and-shovels play. Data centers drive growth in Communications, Commercial & Industrial, and Infrastructure Solutions, and management called data centers the primary growth driver.

• Infrastructure Solutions builds the generator enclosures and power distribution gear these facilities need.

Future opportunities:

• Estimating and bidding: AI trained on thousands of past bids could tighten estimates and speed up quotes on a $4.5B backlog.

• Crew scheduling: matching licensed electricians to jobs across states is a hard optimization problem, and small improvements here drop straight to margin.

• Prefab design: AI-assisted layouts could push more work into controlled shop settings and away from expensive on-site labor.

• Predictive maintenance: the motor and generator repair business could use sensor data to sell repair work before failures happen.

Bumps in the Road

• Data center concentration. Three of four segments now lean on the same end market. If hyperscaler spending pauses, a lot of backlog could slow at once.

• Residential is weak. Housing softness has pushed that segment's revenue down and its margin close to zero, and it's still a big slice of revenue.

• Labor. Growth depends on hiring and training electricians faster than competitors in a tight market.

• Integration and execution risk. DBM adds ~$1.5B of revenue and ~4,000 people in structural steel, a new trade for IES, and one badly bid fixed-price project can wipe out a quarter's profit.

• Controlled company. Tontine's majority stake keeps strategy consistent, but outside shareholders have little say, and the float is thin.

Your Swipe File

• Invest in capacity before demand shows up (low multiples combined with marginal financial performance = cheap assets).

• The fastest path into a new market is can be tagging along with current customers.

• Keep the balance sheet clean enough to be able to jump on acquisitions. IES borrowed for Gulf Island and paid it back within a quarter out of operating cash. Now it's running the same play at 3.5x the size with DBM.

• Track margin by segment. IES's mix shift toward higher-margin work did more for profits than raw volume.

• Treat trained people as your IP. In a trade business, the labor is just as much the product as your service