MasTec, Inc. MTZ is poised to grow on strong backlog and project pipeline coupled with continued acquisitions. The company even raised its 2018 guidance on the back of anticipated prospects for its segments.
However, a highly competitive and fragmented industry along with risk of project delays raises concern. Shares of MasTec have lost 24% in the past year, comparing favorably with the industry’s 35.7% decline.
Robust Backlog and Wireless & Wireline Business to Aid Growth
MasTec is poised to gain from significant project awards across multiple segments. As of Sep 30, 2018, the company achieved a record 18-month backlog of $7.8 billion, reflecting an increase of 56.2% from the prior-year quarter. This marks the fourth consecutive quarter of record total backlog, depicting significantly strong demand in its end markets for 2018, 2019 and beyond. In the third quarter, the company hiked its 2018 adjusted EBITDA to $719 million from $708 million expected earlier and adjusted EPS to $3.76 from the prior expectation of $3.67.
Meanwhile, MasTec projects 2018 annual revenues at a record level of $6.9 billion. Driven by the backlog generated from the combination of increased renewable project activity and the expansion of services into biomass and other smaller production facilities, the Power Generation & Industrial segment is likely to show significant growth. The Communications segment will benefit from fiber deployments, FirstNet and the initiation of 5G rollouts.
Meanwhile, MasTec’s wireless business has significant potential given that substantial investments are expected in wireless infrastructure related to the densification associated with 5G deployment. We believe both 5G and FirstNet will drive revenues.
In its wireline markets, fiber expansion continues to be a growth driver. The company believes that customers are aggressively deploying fiber assets and these levels will significantly increase in 2018, with a considerable ramp-up in 2019. The company expects strong nationwide fiber deployment projects from both telephone companies and cable TV companies that will provide it with significant opportunities over the coming years. In fact, it posted strong double-digit growth in both wireline and wireless during the third quarter with revenues in Wireline marking more than 30% year-over-year growth.
Acquisition Spree Enhances Prospects
MasTec looks to capitalize on rising demand to expand its geographic and customer base. In 2017, MasTec completed three acquisitions. In April 2017, MasTec acquired SEFNCO Communications, Inc., a telecommunications service provider primarily serving the cable TV industry in the West Coast. In the second quarter, MasTec acquired TX-based infrastructure construction company, Cash Construction that will provide exposure to a growing water market.
In fact, in the first nine months of 2018, acquisitions contributed approximately 2.8% to total consolidated revenues. The company also acquired a leasing company of Oil & Gas specialty pipeline equipment which will lend it a competitive edge.
Intense Competition/Project Delays Hurt
MasTec operates in a highly competitive and fragmented industry with only a few barriers to entry in the markets. The company also faces execution risks. If the company fails to manage projects or faces project delays, it could result in additional costs or claims. The company’s Oil & Gas pipeline segment revenues declined 10% year over year in the third quarter of 2018 due to regulatory-imposed work delays and hurricane-flooding disruptions at a few large projects.
Moreover, MasTec derives a significant amount of revenues from a few large customers. Customer concentration increases the risk of the company to individual customer capital budgets cuts, which might impact results.
Also, ongoing headwinds at the Communications segment are concerning. It continues to experience decline in home fulfillment services due to the slowdown in the Security business, the exit of Cellular Delivery businesses and softness in the DIRECTV installation business.
Zacks Rank & Key Picks
MasTec currently carries a Zacks Rank #3 (Hold).
A few better-ranked stocks in the Building Products – Heavy construction industry are Great Lakes Dredge & Dock Corporation GLDD, EMCOR Group, Inc. EME and Primoris Services Corporation PRIM. While Great Lakes sports a Zacks Rank #1 (Strong Buy), EMCOR and Primoris carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Great Lakes has an expected earnings growth rate of 111.1% for 2018.
EMCOR is expected to see earnings growth of 20% in 2018.
Primoris expects 2018 earnings growth of 30.4%.
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