Hurricane Sandy focused the nation on the urgent problem that our outdated power grid has created. In the wake of Sandy many homeowners and businesses remained without power for weeks. The lack of electrical power also brought ground transportation to a screeching halt as many gas stations shut down due to lack of power to pump fuel which made it very difficult to obtain fuel to run a vehicle. Power grid construction companies will benefit from the added revenue that they obtain directly from fixing the damage caused by Sandy and will benefit indirectly as demand across the industry will be greatly increased and thus capacity will be strained.
While Sandy is increasing the demand in the industry, demand for power grid construction and repair was already in great demand. According to an MYR Group presentation, Electrical Power Transmission Construction Spending is anticipated to increase by 16% in 2013. Deutsche analyst Vishal Shah states that they expect a 3x increase in North American transmission spending over the next 10 years. According to Jim Cramer, 30% of our electrical infrastructure is already beyond its useful life and another 30% is approaching the end of its usefulness. Finally, according to Pike Electric Corporation, a housing recovery represents an upside.
Five stocks in the electrical grid construction business are Goldfield Corp. (GV), MasTec, Inc. (MTZ), MYR Group, Inc. (MYRG), Pike Electric Corporation (PIKE), and Quanta Services, Inc. (PWR). These companies had very good price performance in 2012 and from the looks of it are poised to perform well in 2013.
Goldfield is a leading provider of electrical construction and maintenance services in the energy infrastructure industry primarily in the southeastern, mid-Atlantic, and western regions of the United States. The company specializes in installing and maintaining electrical transmission lines for a wide range of electric utilities. Goldfield has been growing rapidly with revenue growth of 161% for the first 9 months of the year. Furthermore, EPS for the first nine months swung from -$0.03 in 2011 to $0.30 in 2012.
GV stated the following in the Q3'12 earnings report: "About $24.4M of the current backlog is expected to be completed in the fourth quarter of this year." That should result in the highest revenue quarter of the year and the fifth consecutive quarter of sequentially increasing revenue. However, investors are a bit skeptical as a large part of backlog is one big contract. I think that there are many reasons to be optimistic and that investors shouldn't be so skeptical. Here are the reasons for my optimism going forward:
The macro trends for the power grid industry suggest increasing revenue as identified above.
A director, Jeffrey Eberwein purchased 140,000 shares in the month of November. That is a significant sized purchase for a name of this size. Insider buying is often a sign that the stock is undervalued particularly when purchases of this size are made.
The company made a large investment of $7.9M in additional equipment in July of this year. They have steadily been investing as property, building and equipment has increased by $13.6M in the first nine months of the year to $24.1M from $10.5M. It seems highly unlikely that the company would invest this much in equipment if significant follow on orders were not expected.
The company stated the following in their Q3'12 PR: "With the strong team we have assembled, we believe we are well positioned to take advantage of future opportunities to build on our record growth." Their comment seems to indicate that they have plenty of additional growth ahead of them.
Other names in this space are expected to grow in 2013 (see commentary below).
MasTec, Inc., is an infrastructure construction company that engages in engineering, building, installing, maintaining, and upgrading energy, communication, and utility infrastructure in North America. While they perform services in the electrical transmission area, they also provide services in areas such as pipelines, wireless, wireline, and install-to-the-home. So, they are not a pure play in the electrical grid space. The analysts that are following them are expecting continued growth in 2013 as revenue is expected to increase from $3.70B in 2012 to $3.93B in 2013 and EPS is expected to increase from $1.50 to $1.89 from 2012 to 2013. While the growth does look good, the heavy insider selling does throw a caution flag.
MYR Group, Inc.
MYR Group Inc. operates as a specialty contractor serving the electrical infrastructure market in the United States. The company operates in two segments: Transmission and Distribution, and Commercial and Industrial. Analysts are expecting growth in 2013 as revenue is expected to increase from $1.01B to $1.07B and EPS is expected to increase from $1.57 to $1.76. MYRG does have some insider selling but they are largely sells according to rule 10b5-1 trading plans which are previously arranged and may not indicate a negative sentiment of the seller.
Pike Electric Corporation
Pike Electric Corporation is a leading provider of energy solutions to over 300 investor-owned, municipal and co-operative utilities in the United States. Their comprehensive services include facilities planning and siting, permitting, engineering, design, installation, maintenance and repair of electric and communication infrastructure, including renewable energy projects and storm-related services. Analysts are expecting fiscal 2013 revenue to increase to $901M from $685M in fiscal 2012 and EPS is expected to increase to $0.73 from $0.31. The insider transactions here are slightly bullish as there has been little insider selling despite the rise in stock price. Almost all selling was done to pay taxes on vesting of restricted stock.
Quanta Services, Inc.
Quanta Services is a leading specialized contracting services company, delivering infrastructure solutions for the electric power and natural gas and pipeline industries in North American and in certain international markets. Quanta Services is also expected to grow in 2013 as revenue is expected to increase to $6.66B from an expected $6.23B in 2012. Furthermore, EPS is expected to increase to $1.56 in 2013 from $1.36 in 2012. There is some insider selling on this name but it appears to be minor.
The table below shows some metrics for these five companies. As you can see from this table, GV appears to be very undervalued based upon it's tiny PE which is a mere fraction of it's peers. I believe that the skepticism shown by this PE will prove to be unfounded for the reasons identified above. Because of this low PE, I believe GV is the most undervalued in this growing field and thus is the most attractive.
Diluted EPS Last Quarter
MYR Group, Inc.
Pike Electric Corporation
Quanta Services, Inc.
Note: EPS numbers in the table above are GAAP whereas prior numbers for MTZ, MYRG, PIKE, and PWR may be non-GAAP.
Disclosure: I am long GV.