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4 Factors That Underscore Quanta Services' Solid Prospects

Quanta Services Inc.’s PWR solid end-market prospects and robust three-pronged growth strategy have been aiding the company to deliver strong results over the last few quarters. Moreover, its focus on base business, long-term programmatic spend of utilities and technology deployments position it well for the future.

Recently, the company reported solid results in third-quarter 2019. The top and bottom lines surpassed the Zacks Consensus Estimate by 6% and 9.6%, respectively. Also, the metrics increased 12% and 29.5%, respectively, on a year-over-year basis. Backed by increased visibility and sustained higher infrastructure investment across end-markets served, the company lifted its 2019 revenues, earnings and adjusted EBITDA guidance.

Meanwhile, shares of this Zacks Rank #1 (Strong Buy) company  have jumped 21% over the past six months compared with 9.7% gain of S&P 500 and 7.2% increase of its industry. Estimates for 2019 and 2020 have moved 1.3% and 4.9% upward, respectively, over the past 30 days, reflecting analysts’ optimism surrounding the stock’s earnings growth potential.

Let’s delve deeper into the factors that make this stock a solid pick for investors.

Impressive Growth Across Business & Upbeat View: Quanta Services’ performance has been robust over the last few quarters. The company’s earnings topped analysts’ expectations in six out of the last nine quarters. Moreover, its revenues surpassed the consensus estimate in 10 of the trailing 11 quarters.

The company’s third-quarter performance — which was backed by the above-mentioned tailwinds — and recent acquisitions should help it to perform impressively in the rest of 2019. For 2019, the company projects earnings in the range of $3.16-$3.28 per share (up from $2.81 in 2018). Revenues are expected to be nearly $12 billion ($11.17 billion reported in 2018), and adjusted EBITDA is anticipated between $904 million and $932 million.

Robust top line, sound execution of projects and strong growth strategy have been benefiting the company. These are expected to support its growth in the upcoming periods as well. This is evident from the Zacks Consensus Estimate for 2019 earnings of $3.23 per share, which indicates 15% improvement from the year-ago period.

End-Market Prospects to Drive Top Line: Quanta Services’ segments, namely Electric Power and Pipeline and Industrial Infrastructure Services, remain strong on the top-line front. As of Sep 30, 2019, the company had total backlog of $13.3 billion and 12-month backlog of $7.6 billion. This compares favorably with $12.3 billion of total backlog and $7 billion of 12-month backlog at 2018-end.

Prospects of the Electric Power segment remain robust, given customers’ investment in grid modernization programs to accommodate a changing fuel generation mix toward natural gas and renewables, intended to address the aging infrastructure, strengthen systems for resiliency against extreme weather conditions and support long-term economic growth. The segment’s 12-month backlog at the end of third-quarter 2019 was $4.98 billion and total backlog was $8.64 billion, up 17.8% and 9.1% year over year, respectively.

Meanwhile, its Pipeline and Industrial Infrastructure segment’s outlook looks equally promising, primarily on the back of improving mainline and natural gas distribution, and integrity markets. As of Sep 30, 2019, the segment’s 12-month backlog was $2.58 billion and total backlog amounted to $4.64 billion, up from $2.41 billion and $3.79 billion reported at 2018-end, respectively. The release of customer budgets, improved weather and commencement of scheduled projects should boost the segment’s results in the coming quarters.

Solid Inorganic Drive: Acquisitions have been Quanta Services’ preferred mode of boosting market share and developing incremental backlog. The company completed six acquisitions during the first nine months of 2019 and four in 2018.

In August 2019, it acquired The Hallen Construction Co., Inc. (Hallen), a leading gas utility contractor serving the U.S. Northeast markets. Hallen mainly provides gas distribution and transmission services, along with some underground electrical distribution and transmission exposure. Also, during the third quarter, it added two specialty utility foundation contractors in the Southeast market.

The company believes that the Hallen buyout and persistent margin enhancement efforts will help it in achieving its medium-term target operating margins of upper single digits for the Pipeline and Industrial Infrastructure Services segment. The acquisitions are expected to contribute $175 million to total revenues in 2019 and $525-$575 million in 2020.

Superior ROE: Its return on equity (ROE) supports growth potential. The company’s ROE of 12.2% compares favorably with the industry’s average of 10.4%, implying that it is efficient in using its shareholders’ funds.

Other Stocks to Consider

Other top-ranked stocks in the same space include Gates Industrial Corporation plc GTES, Jacobs Engineering Group Inc. JEC and AECOM ACM. While Gates Industrial sports a Zacks Rank #1, Jacobs and AECOM carry a Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Gates Industrial surpassed the Zacks Consensus Estimate in two of the trailing four quarters, with an average positive surprise of 12.1%.

Jacobs and AECOM’s long-term earnings are expected to grow 11% and 9.3%, respectively.

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