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Solid Backlog to Aid MasTec (MTZ) Amid Stiff Competition

Zacks Equity Research

MasTec, Inc. MTZ is riding high on strong backlog, strategic acquisitions, along with robust performance of the Power Generation and Industrial segment. On a further encouraging note, solid pipeline business in the Oil & Gas segment bodes well for its future prospects. Shares of MasTec have gained 15% in the past three months, comparing favorably with its industry’s rally of 7.1%.

However, intense competition, a fragmented industry, along with risk of project delays and higher ramp-up costs are likely to impact its bottom line, going forward.

Let’s delve deeper into other factors that substantiate its Zacks Rank #3 (Hold).

Catalysts Driving Growth

MasTec’s top line is likely to gain from significant project awards across segments. In 2018, the company came up with a record 18-month backlog of $7.7 billion, up 9% year over year, marking the third consecutive year of noteworthy financial performance.

The company’s strong demand in its end markets will help it to post improved 2019 results. MasTec projects 2019 annual revenues at a record level of $7.6 billion, primarily on the back of Communications, Transmission and Power Generation segments. Notably, its Communications segment will benefit from fiber deployments and the execution of 5G rollouts in 2019.

MasTec’s wireless business has significant potential, given expected substantial investments in wireless infrastructure related to the densification associated with 5G deployment. Fiber expansion continues to be a growth driver in wireline markets. The company expects strong nationwide fiber deployment projects from both telephone and cable TV companies to provide it with significant opportunities in 2019 and beyond. The company expects approximately 20% growth in both wireline and wireless market in 2019.

Its strategic acquisitions bode well for its overall performance. MasTec focuses to capitalize on rising demand in order to expand its geographic and customer base. In 2018, MasTec acquired a construction management firm specializing in steel building systems as well as a wind turbine services company, as part of the Power Generation and Industrial segment. Acquisitions contributed approximately 2.2% to total consolidated revenues of the company in 2018.

Its Power Generation and Industrial segment has been a significant driver of revenues and margins over the last few quarters. In 2018, the segment’s revenues increased 5% and backlog surged an impressive 172% to $610 million from $354 million at the end of 2017. The positive performance was backed by operational improvements carried out in the segment.

Causes of Concern

MasTec operates in a highly competitive and fragmented industry, with only a few barriers to entry in the markets. Any organization that has adequate financial resources and access to technical expertise may become its competitor. The company faces risk of project delays, which might result in additional costs or claims. The company’s Oil & Gas pipeline segment has been suffering from such risks, due to regulatory-imposed work delays and hurricane-flooding disruptions at a few large projects.

Its new initiatives such as 5G, FirstNet and Verizon One Fiber will be in various stages of ramping during 2019, thereby incurring higher costs. The company’s 2019 guidance includes the impact of expected ramp-up costs from the Communications segment related to wireless and wireline fiber initiatives, as MasTec is expected to incur high costs.

Key Picks

Some better-ranked stocks in the Construction industry are Great Lakes Dredge & Dock Corporation GLDD, North American Construction Group Ltd. NOA and EMCOR Group EME. While Great Lakes and North American Construction sport a Zacks Rank #1, EMCOR carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Great Lakes has an expected earnings growth rate of 170.6% for 2019.

North American Construction’s 2020 earnings are projected to grow 17.2%.

EMCOR is expected to record earnings growth of 6.9% in 2019.

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