This Infrastructure Stock Has Upside
MasTec is a force to be reckoned with in both two key infrastructure markets: telecom and oil/gas. The company largely performs construction, engineering, and maintenance on wireless and wireline communications networks. It is also involved in the oil and gas pipeline and facility market. There are some risks entailed, including a slowing of wind farm construction demand. Still, opportunities abound in its key markets served, making its earnings outlook very good.
Telecom a near-term growth driver
Consumers and businesses are increasingly relying on higher-speed Internet, wireless, data, and video/music downloads, and their demand drives the expansion of next-generation 4G and LTE networks. MasTec is poised to gain from the continued upturn in sales of smartphones and tablets as it collaborates with telecoms such as AT&T, as well as satellite companies including DIRECTV. The American Recovery and Reinvestment Act allocated $7.2 billion toward the expansion of broadband services to rural locations, and MasTec remains one beneficiary of these outlays. The numbers bear this out, as its communications revenues rose 15% in the June quarter and its communications backlog increased 21%.
Elsewhere, MasTec's oil and gas division appears poised for ongoing rapid income growth. The unit contributes about 30% of total revenue. Its EBITDA more than tripled in the latest quarter. Plus, the oil and gas backlog soared dramatically, auguring well for profit gains in upcoming quarters. This outstanding upturn is partly tied to acquisitions. Finally, MasTec also operates a solidly growing electrical transmission business, and a slumping power generation and industrial segment. That last division is feeling the impact of the aforementioned wind-market weakness.
MasTec is not the only company seeing the opportunity in telecom networking. Fellow industry participants are also jumping on the trend. When Dycom Industries bought out the telecommunications infrastructure business of Quanta Services in December 2012, there was uncertainty as to the direction of the telecom equipment industry.
That acquisition turned out to be a boon to sales for Dycom. In fact, demand from the likes of AT&T, CenturyLink, Comcast, and Verizon helped sales to rise about 34% in the fiscal year that ended in July (see its Financial Ratios). This even far exceeds the performance of MasTec's telecom unit. The challenge that Dycom has faced is margin shrinkage due to costs from previous acquisitions.
Dycom a formidable rival in telecom
Dycom's margin weakness remains an issue. The company is probably back on a growth path in terms of earnings, however. Looking ahead, it has numerous opportunities in mobile broadband, as well as cable data and voice services. Upgrades to 4G will continue to fuel growth. One factor supporting this outlook is Dycom's 40% higher backlog on a year-over-year basis as of July 27. As most of its business is underground work for telecoms, Dycom should perform well over the next twelve months (see its Earnings/Growth Rates.)
The company's prospects for the next three to five years are healthy as well based on its strategy. While external catalysts such as mobile network expansion will help, Dycom also plans to build its market share by gaining new business with large existing customers. While MasTec's buyout activity has mostly been in its energy operations, Dycom may also expand further by acquiring some of its telecom-focused rivals.
Quanta also a pipeline growth story
After selling off its telecom unit, Quanta Services remains a formidable entity. The majority of its business is in the electric power and natural gas and pipeline markets.
MasTec's oil and gas business is mostly focused on the development of new shale reserves, while it views the development of the national electrical grid and renewable energy businesses as future growth drivers. Quanta, meantime, is firmly situated to benefit from the overhaul and upgrade of the grid, as well as the likely transition to domestic energy production that will require natural gas and oil pipelines.
Along with MasTec, Quanta could profit from the heightened production of crude oil and gas from the Canadian oil sands and U.S. shale formations, though it may take a few years for those projects to reach their full fruition.
The risks Quanta is up against include its dependence on stable energy prices to sustain demand, along with regulatory and project timing delays. That said, Quanta looks like a company to buy and hold for the long run. On that note, a strong balance sheet should support investments in higher-growth businesses, such as renewables (see its Financial Strength.)
Speaking of energy infrastructure
One of Quanta's counterparts in the development of U.S. energy infrastructure is Primoris Services . Primoris mostly serves the petroleum, petrochemical, and water industries in the southeast and western portions of the country.
Primoris completed several acquisitions in 2012 that are providing a substantial boost to revenue. Its drawback has been soft gross margins (see its Financial Ratios) due to certain project start-up costs and a low-margined pipeline project. Notably, though, its buyout of Sprint Pipeline Services has helped it to build a base of pipeline construction operations in the southeast.
Indeed, Primoris is following MasTec into that market. The natural gas pipeline construction and gas shale formation development (both energy infrastructure projects) trend should support Primoris' earnings over the next few years. It, too, will be a major player in the transition to energy independence in the U.S. and toward renewable energy. As such, gross margin and earnings improvements appear to be in the cards.
Summing it up
MasTec is well-situated in two markets where spending is likely to increase, which could lead the company to better results. Dycom, Quanta, and Primoris might also enjoy those benefits, but in some cases, they're having trouble digesting some of their recent acquisitions. For example, Dycom's Quanta assets bolstered revenues during the first year after purchase, but Dycom suffered an earnings downturn. It is likely now in store for a rebound in profits for 2013.
Telecom infrastructure and oil & gas pipeline related expenditures will probably continue to build going forward, making MasTec's stock look promising.
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The article This Infrastructure Stock Has Upside originally appeared on Fool.com.Damon Churchwell has no position in any stocks mentioned. The Motley Fool recommends MasTec. The Motley Fool owns shares of MasTec. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.