Quanta Services: Backbone Of The Energy Revolution

May.15.14 | About: Quanta Services (PWR)

Summary

Natural gas discoveries in North America have prompted energy companies to expand their domestic businesses.

The general market has used this development to own companies that are benefiting from this expansion, but have overlooked some pillars of the energy boom.

Quanta Services is a company that is in prime condition to expand energy infrastructure in the United States, and is currently undervalued by as much as 25%.

It's no news that energy production in the United States has ramped up considerably in the last five years. Natural gas discoveries in much of the northeast, as well as in parts of Texas and Louisiana, have sparked significant growth and expansion in the business of extracting, refining and distributing this new resource to the rest of the United States. From a market standpoint, this development creates many opportunities to profit from new natural gas discoveries and the impact it has on business activity. When news of these discoveries first surfaced, many investors immediately piled into stocks that extract and refine natural gas, as well as master limited partnerships whose goal it was to safely distribute these resources throughout the country. However, as the energy boom has matured, one key pillar of the expansion has been largely ignored by investors - the infrastructure needed to handle an influx of natural gas supply.

One such company that contracts these vital infrastructure projects is Quanta Services (NYSE:PWR), which has a leading share of the industry and represents clients that are taking advantage of the oil and gas boom. These clients include Marathon Petroleum (NYSE:MRO), Kinder Morgan Energy Partners (NYSE:KMP) and Duke Energy (NYSE:DUK) as well as other key players in the natural gas market. Investors looking to take further advantage of the natural gas revolution in the United States can buy into this name before the majority of oil and gas companies expand their national infrastructure and look to Quanta Services to implement these changes.

As previously stated, Quanta Services is a provider of specialty contracting services to the electric power and the oil/gas industry in the United States and abroad. Quanta's services include the design, installation and repair of infrastructure related to these industries, and it services clients based on their capabilities and needs. When the company reported first quarter earnings on May 1st, it impressed Wall Street by surprising analyst estimates on both the top and bottom line. In fact, this earnings announcement marks the 9th consecutive quarter where EPS numbers have beaten Wall Street expectations. If this pattern continues, look for momentum in PWR to accumulate as both analysts and investors realize the consistent performance of Quanta's management and their track record of delivering above expectations.

During the conference call, the company's management reported results that had them excited, and should give shareholders cause for excitement, too. This included a record contract backlog of $9 billion, up 29% year over year. To put this number in perspective for the future earnings power of the company, $9 billion can be divided over each individual share of PWR stock. $9 billion / 213 million shares outstanding gives us a backlog per share of over $42, which for a company with EPS of $1.78 represents a substantial amount of future income. Investors can use this number to stay clear on the future cash flow expected for Quanta and how that affects the way management enters into new contracts.

Quanta also reported a 9.4% increase in hiring during the quarter. If other metrics aren't impressing potential shareholders, this one should, because a company that is adding employees to its payroll is showing that it is confident enough in its future growth and is making material progress on its business strategy. One reason Quanta is hiring new employees is to service a new project given by FirstEnergy. This $4.2 billion project, spread over 4 years, is aimed at improving the company's efficiency in its Ohio energy market as coal-based plants undergo retirement from service. This project and others like it show the proactive nature of Quanta's management as it seeks to expand its client base and grow its contract backlog. Throughout the rest of the earnings conference call, management gave a remarkably upbeat tone when they talked about the future outlook of the company. Especially looking at the oil and gas market, Quanta executives see a potential for billions of dollars in investment over the next few years as energy companies expand their infrastructure to keep up with the influx of natural gas supply. They called it a "historic time" in the energy market, and are looking to use their current market share and client base to capitalize on this significant rotation.

Quanta Service's management team is led by CEO James O'Neil, who has held the Chief Executive position since 2011. O'Neil, a 15 year veteran of Quanta, has risen through the ranks to become CEO and has held a variety of other executive positions prior to his current title. This gives O'Neil insight into the inner workings of the company and a familiarity with the infrastructure business, which makes it even more remarkable when he talks about an energy opportunity as significant as his tone suggested on May 1st. Since his promotion to CEO, O'Neil has seen PWR's stock price up 42% and revenues increase more than 80%, an impressive track record by any standard. O'Neil also owns close to 400,000 shares of PWR stock, which should give shareholders comfort. This is because executives who own stock in their own company have an interest in the future success of their stock, which is aligned with the goal of shareholders. This means that if investors buy into Quanta's growth story, they are buying alongside Quanta employees and executives, which is a bullish sign for the future performance of the stock.

Apart from the company's earnings report, other metrics at Quanta Services show the company is poised to outperform as the energy market continues to grow. Financially, Quanta is healthy and lean, with no debt on its balance sheet and close to $500 million in cash at the end of 2013. This cash can be used to buy back stock, reinvest in future projects or potentially initiate a dividend for shareholders. No matter what plans are for Quanta's finances, the company's strong balance sheet will enable it to be flexible when considering how to best reward its shareholders.

When looking at the company's valuation, there are other indications that show investors may not have priced in Quanta's expectation of increased energy market growth down the road. Over the past five years, Quanta has racked up an impressive 24.7% annual rate of EPS growth, which reflects strong project demand and increased activity in its core divisions. However, despite this significant rate of growth, PWR sports a multiple of only 19 times earnings. If investors valued this rate of growth properly, Quanta would trade at closer to 24 times earnings and be backed up with strong earnings growth to support that valuation. This would put PWR in a price range of around $42 per share, a 25% increase from current prices. Quanta's strong financial position and future expectation of large energy contracts supports a higher valuation than is currently given to the stock, and investors should look to PWR to move closer to this valuation as it continues its pattern of beating Wall Street expectations.

With an energy market that has been radically changed by recent natural gas discoveries, investors have looked to capitalize on the companies that are best positioned to prosper from the new supply. However, even after the initial bounce some energy stocks might get from the news, companies still exist that haven't fully benefited from the business shift in the United States, and have therefore not been valued according to their future earnings potential. Quanta Services is one of these names, and has both the experienced management and the financial flexibility to fully take advantage of an expansion of infrastructure in North America. Investors should look for PWR to prolong its pattern of surprising Wall Street and its own shareholders with its outperformance in the energy industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.