Overview: Quanta Services (NYSE:PWR) is one of the largest providers of specialty infrastructure contracting services to the electric power and oil & gas industries in the U.S., Canada, Australia and other Latin American markets. The company’s largest segment, Electric Power Infrastructure Services (~2/3 of sales in FY16) designs and installs electric power transmission and distribution infrastructure, restores and repairs weather-damaged equipment via emergency services, upgrades smart grid electric power networks and installs and maintains renewable energy generation facilities, which include solar, wind and certain types of natural gas generation. The Oil and Gas Infrastructure Services segment (~1/3 of sales) designs and installs natural gas, oil and other pipeline transmission and distribution systems, gathering, production and storage systems, and compressor and pump stations, as well as repairs and provides maintenance for infrastructure, including pipeline protection, integrity testing, rehabilitation and replacement of pipeline support systems. Geographically, 79% of PWR’s sales come from the U.S., with 16% of sales from Canada and the remaining 5% from Australia and Latin America. We like PWR for the following reasons:
Leading integrated infrastructure solutions provider: Quanta is the No 1 Specialty, Utility, Electrical, and Pipeline contractor in North America. Based on revenues by project types, nearly half of its revenues are derived from Master Service Agreement (MSA) and Maintenance & Repair, which provides steady, recurring revenue streams. The other half of QWR’s revenues is generated from New Construction related activities. Quanta has strong relationships with the majority of U.S. investor owned utilities and Canadian utilities, with many going back for decades. Its top 10 largest customers accounted for approximately 30% of revenues. Quanta enjoys competitive advantage over the specialty contractors and traditional E&C companies, thanks to the combination of its strong balance sheet and its ability to execute large infrastructure projects and provide sophisticated solutions for customers’ multiyear build programs.
Record Backlog and Margin Expansion opportunities: At the end of Q3 2017, PWR’s total backlog reached $10.5 billion, up 8.2% year over year and a record. Moreover, those record backlogs exclude many big projects that were already won by PWR but are still in the process of getting permits and regulatory approvals. PWR’s operating margins recovered in 2016 from the 2015 trough and are expected to continue the trajectory of moving higher in 2017 (at ~5% EBIT) and forward. Over the long-term, management expects the Electric Power Infrastructure Services segment operating margins to reach 10% – 12%, on par with the levels before the 2014/2015 slowdown. The Oil and Gas segment operating margins are expected to reach unprecedented levels of 9% – 12% in the long run, as the demand for large-diameter, high margin pipe work is expected to increase in order to transport the oil and natural gas from currently undeveloped U.S. shale regions to necessary refining or loading centers.
Catalyst: Quanta’s end markets are strong, visibility is improving and the company believes it is in the earlier stages of a renewed multi-year upcycle with continued opportunity for record backlogs. Current consensus estimates call for Quanta’s EPS to grow at a CAGR of 20% from 2016 to 2019. Quanta’s base businesses are promising, and the company will benefit from two additional stimuli:
1. The recently passed US corporate tax cut will improve PWR’s earnings power materially, given the company generates nearly 70% of its business from the US and currently has a tax rate of nearly 35%.
2. We believe infrastructure spending is a top legislative priority for the White House and the GOP controlled congress in 2018, and it is reported a infrastructure plan could be unveiled as early as in late January. The infrastructure proposal could have a price tag as high as $1 trillion, and will cover transportation infrastructure, energy, water and potentially broadband and veterans hospitals. Modernizing US’ energy infrastructure will be a sweet spot for PWR which enjoys extensive expertise in this area.