Impressive earnings and solid growth strategy, along with strong segmental performance and buyout synergies, bode well for Quanta Services PWR. Consequently, shares of the company have outperformed its industry so far this year. Earnings estimates for the fourth quarter have also moved 19.7% up over the past 60 days, reflecting analyst’s optimism surrounding the stock’s earnings growth potential.
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However, inadequate resource utilization and regulatory challenges, as well as business risks like project delays, stiff competition, and oil & gas volatility, pose concerns. Let’s delve deeper.
Growth Catalysts
In the first nine months of 2018, Quanta Services’ adjusted earnings and revenues increased 21.7% and 15.3% year over year, respectively. The improved results were aided by robust revenue growth across the board along with sound execution of its projects.
Quanta Services is experiencing solid prospects in its Electric Power segment, particularly in its communications infrastructure services business. Notably, the company booked $4,228.1 million of backlog in the first nine months ending on Sep 30, 2018. Further, the segment’s revenues increased 15.3% and operating margin expanded 80 basis points (bps) year over year in the same period. The upside was mainly driven by increased customer spending associated with electric transmission projects and distribution services. Additionally, large transmission project in Canada, revenues from communication infrastructure services and favorable foreign currency exchange rates acted as tailwinds.
Moreover, the company’s Oil and Gas segment has recorded double-digit revenue growth year over year in the past three quarters on account of incremental revenues from Stronghold (acquired in July 2017). Furthermore, solid gas distribution services and sound execution of its projects compared with the execution of projects in the prior year supported the segment’s performance.
Notably, the company remains optimistic about its overall performance in the upcoming quarter, given strong core business activity that increases seasonally and ramps-up construction activity in the larger pipeline projects.
Quanta Services is pursuing a three-pronged growth strategy, which focuses on timely delivery of projects to satisfy customer’s expectation, leveraging its core business to expand portfolio and exploring new service lines. The company remains confident about the prospects of its end markets in both segments, stemming from healthy backlog levels that are expected to grow further. Moreover, acquisition is one of the fundamental components of the company to boost its market share and develop incremental backlog. Acquisitions added approximately $32.2 million to the total revenues in the first nine months of 2018.
Hurdles to Cross
Currently, Quanta Services is experiencing delays in its processing facility project, which is expected to result in liquidated damages. Consequently, it took conservative position on a difficult horizontal drill project and incurred additional costs during the third quarter of 2018. Further, the delays caused an unexpected loss of approximately $13 million in the same period. Meanwhile, the company lowered its full-year operating margin expectation in the Oil & Gas segment to 5.3-5.5% from 5.4-6.4% mentioned earlier.
The segment’s operating margins declined 110 bps in the past three quarters due to reduced capital spending by customers on large diameter pipeline projects as well as additional charges associated projects. Additionally, its business involves a large chunk of outdoor activities, which are exposed to unfavorable weather conditions.
Moreover, the company is exposed to exchange rate fluctuations. In fact, revenues in the past three quarters were negatively impacted due to unfavorable foreign currency exchange rates. During the third quarter, revenues from foreign operations accounted for 22.4% of total revenues while fluctuations caused loss of approximately $30 million revenues compared with the prior year.
Zacks Rank & Stocks to Consider
Currently, Quanta Services carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Zacks Construction sector are KBR, Inc. KBR, Altair Engineering Inc. ALTR and EMCOR Group, Inc. EME, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
KBR has surpassed earnings estimates in three of the past four quarters, the average positive surprise being 12.6%.
Altair’s earnings are expected to grow 23.1% in 2018.
EMCOR’s earnings for the current year are expected to increase 20%.
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