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Buyouts, Infrastructure Services Aid Quanta (PWR) Amid Hurdles

Zacks Equity Research

Quanta Services Inc. PWR has been benefiting from its focus on the base business, long-term programmatic spend of utilities, and development of infrastructure that supports technology deployments such as 5G and electric vehicles. Shares of the company have gained 27.3% over the past year, outperforming its industry’s 20.7% rally. Also, it has outperformed the S&P 500’s 24.9% rise in the said period. The company’s price performance was mainly driven by a solid earnings surprise history, having surpassed the Zacks Consensus Estimate in 10 of the trailing 13 quarters.

The above-mentioned tailwinds, acquisitions — which were completed in the third quarter — and construction on the Watay and East West Tie Line transmission projects are set to put the company on growth trajectory in 2020 and beyond.

However, volatility in Pipeline and Industrial operations, and consumer spending have been affecting the company’s projects, as well as orders.

Let’s delve deeper into the factors supporting its Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Major Growth Drivers

Quanta Services has been delivering robust performance over the last few quarters. Notably, the company’s earnings grew 30.3% year over year in the first nine months of 2019, backed by strong segmental performance. Quanta Services believes that the delivery of energized services differentiates it from its competitors and helps it win new businesses. Currently, the company is pursuing a three-pronged growth strategy focusing on timely delivery of projects to exceed customer expectation; leverage on core business for expansion in complementary adjacent service lines and continue exploring new service lines.

It ended the third quarter with a record backlog of approximately $13.28 billion and 12-month backlog of $7.56 billion. This compares favorably with $12.34 billion of total backlog and $6.98 billion of 12-month backlog at 2018-end. Also, the reported backlog was up from total backlog of $12.21 billion and 12-month backlog $7.48 billion at the end of third-quarter 2018. This demonstrates the strength of its core operations.

Meanwhile, the Pipeline and Industrial Infrastructure segment’s outlook looks promising. In the first nine months of 2019, the company’s Pipeline and Industrial Infrastructure segment recorded double-digit revenue growth (up 12.8% year over year) and improvement in operating margin (up 200 basis points [bps]). The upside was mainly supported by base business activities in natural gas distribution, pipeline integrity and industrial service operations, as well as significantly larger pipeline project activity.

The North America electric transmission and distribution markets are expected to act as one of the key growth drivers for the company, as the region continues to deploy more capital for transmission and distribution upgrades to improve system reliability, and deliver renewable electricity from new generation sources to the demand centers. In a nutshell, growth of the electric power segment is expected to be fueled by the need to maintain and replace aging infrastructure, generation mix shift to more renewable and natural gas, grid modernization and regulation aimed at improving grid reliability.

Quanta Services sees acquisitions as a fundamental component of its strategy to boost market share and develop incremental backlog. Quanta Services completed six acquisitions during the nine months of 2019 and four during 2018. The 2019 and 2018 buyouts strategically expanded its domestic electric power and communications service offerings.

Key Concerns

Volatility in Pipeline and Industrial operations, and consumer spending have been affecting the company’s projects, as well as orders. The segment’s third-quarter 2019 revenues were somewhat offset by a decline in revenues from larger pipeline projects. Also, in the first nine months of 2019, its Electric Power Infrastructure Services operating margin declined 160 bps due to the absence of large projects compared with the year-ago period.

Key Picks

Some better-ranked stocks in the broader space are KB HOME KBH, M/I Homes, Inc. MHO, and AECOM ACM. While KB HOME and M/I Homes sport a Zacks Rank #1 (Strong Buy), AECOM carries a Zacks Rank #2 (Buy).

KB HOME and AECOM have a three-five year EPS growth rate of 10.9% and 12.4%, respectively.

M/I Homes’ earnings for 2020 are expected to increase 13%.

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