Nine analysts have boosted their earnings outlook for this energy service company in the past 30 days.
Quanta Services (PWR)
From Cabot Stock of the Week
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Like many energy companies, Quanta is based in Houston, Texas. But unlike many energy companies, Quanta has diversified internationally; its operations in Canada and Australia now account for 21% of revenues.
The outlook for the company is fantastic. Revenue growth is coming from all segments of the company, notably from acquisitions, electric power projects and a continued recovery in the natural gas industry. Quanta is benefiting from ongoing upgrades to an aging electrical grid and has a project backlog totaling over $9 billion. In May, CEO Duke Austin remarked, “Our end markets are strengthening and we believe there is opportunity for our backlog to achieve record levels over the coming quarters.”
Quanta completed the acquisition of energy services companies Stronghold, Ltd. and Stronghold Specialty, Ltd. on July 21. Quanta is paying $450 million in cash and stock for the companies. The Stronghold businesses have been producing about $500 million in annual revenue, which will now contribute to Quanta’s oil & gas infrastructure services business. The transaction is expected to be accretive to Quanta’s 2017 net income, to the tune of about $0.06 to $0.07 non-GAAP EPS.
Wall Street expects steady revenue growth from $7.7 billion in 2016 to $8.4 billion in 2017 and $9.1 billion in 2018. Quanta is expected to report second-quarter 2017 earnings per share (EPS) in early August; the consensus EPS estimate is for $0.53, with a range of $0.48 to $0.61. Beyond that, Wall Street’s consensus estimates currently project Quanta to achieve aggressive EPS growth of 31.1% and 19.2% in 2017 and 2018 (December year-end). Analysts’ estimates have barely fluctuated this year, and have recently edged higher. The respective price/earnings ratios (P/Es) are 17.2 and 14.5, much lower than the EPS growth rates, indicating that the stock is undervalued.
Quanta’s common stock share count is interesting if you’re a numbers person who studies stocks. The number of basic outstanding common shares peaked in 2014 at 219.67 million, then declined 11.2% in 2015, and another 19.4% in 2016 to 157.29 million. It’s highly unusual to find companies with such aggressive share repurchases. In May 2017, Quanta authorized a new $300MM share repurchase plan. That could reduce the share count by about 5.6%, or 8.8 million shares.
Quanta’s common stock is 83%-owned by institutions. The stock does not pay a dividend. The long-term debt to-capitalization ratio has been extremely low for many years, and currently stands at 9.6%.
This industrial stock does not have a glamorous story. It’s simply a very undervalued aggressive growth stock. PWR doubled in price from early 2016 through February 2017, and therefore needed to rest and digest its huge run-up. After pulling back in the spring, PWR bottomed in late May, then began its rebound toward recent highs at 38.5. In the last two weeks, the stock completed a double-bottom chart pattern, which is a classic harbinger of near-term price appreciation. Once the stock breaks past 38.5, there’s no upside resistance that could put a ceiling on the share price.
PWR is a bargain at the current price. The stock could reasonably rise to 42.5, giving it a 2018 P/E of 18, which is still below the earnings growth rate. Under that scenario, investors who buy now could earn a 23% capital gain in the coming months. Bullishness within the broader market or among basic industry stocks could push PWR even higher. BUY.
Timothy Lutts, Cabot Stock of the Week, www.cabotwealth.com, 978-745-5532, July 25, 2017