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Summary

  • Severe market sell-off Thursday dragged Quanta Services along despite reporting record second quarter results.
  • The second quarter results surpass consensus expectations for both revenue and EPS.
  • I recommend long-term investors use the market downturn to accumulate shares of Quanta Services.

Thursday was an ugly day for equities to say the least and in the midst of a market wide sell-off, Quanta Services (NYSE:PWR) was taken along for ride. During a mass exodus, nobody cares about record revenues and earnings. Hence, it explains the action in Quanta Thursday, being down over 4% after beating consensus expectations for the second quarter on both top and bottom line. On any other day Quanta would have been up on these numbers, but during a stampede for the exit, even quality names will get trampled over. Once the dust settles, I believe Quanta will move much higher and here's why.

Record Second Quarter Results

In the press release Thursday Quanta announced:

"Revenues in the second quarter of 2014 were $1.86 billion compared to revenues of $1.47 billion in the second quarter of 2013. Net income attributable to common stock was $81.1 million, or $0.37 per diluted share, in the second quarter of 2014, versus net income attributable to common stock of $70.2 million, or $0.33 per diluted share, in the second quarter of 2013. Included in the results for the second quarter of 2013 was non-cash stock-based compensation expense of approximately $4.3 million, or $0.01 per diluted share, related to the retirement of Quanta's former chairman effective May 23, 2013. Adjusted diluted earnings per share (a non-GAAP measure) was $0.43 for the second quarter of 2014 compared to $0.38 for the second quarter of 2013."

These results came in above consensus expectations for both revenues and EPS of $1.80 billion and $0.41, respectively.

Quanta also guided third quarter in line with expectations with revenues ranging "between $2.0 billion and $2.1 billion and diluted earnings per share to be $0.52 to $0.54. Quanta expects adjusted diluted earnings per share for the third quarter of 2014 to be $0.57 to $0.59." Quanta also reaffirmed full year outlook with revenues ranging between $7.6 billion and $7.8 billion and adjusted diluted EPS to between $1.90 to $2.00, in line with consensus expectations.

In the conference call, CEO Jim O'Neil continues to reaffirm his stance that Quanta remains in a "double-digit growth environment" similar to what he has stated before in previous conference calls. I see this growth environment continuing till at least 2015 as the complexity and scale of projects are only increasing. One such project was highlighted on the conference call and was announced on June 2nd, 2014 for PPL Electric Utilities.

The scope for this project entails installing approximately 68 miles of new 230kV and 138kV overhead transmission line, erecting steel transmission structures along with concrete foundations, and the construction and maintenance of access roads. Having been an electrical project manager in the past working on multi-million dollar electrical and distribution work, I can attest that a project of this scale is enormous. There are only a handful of specialty contractors in North America that can handle the scale of projects similar to this. The bonding requirement alone on a project of this size would prevent any smaller and mid. size contractors from bidding for the work. Going forward, this will result in less competition and better pricing due to a demand and supply imbalance as demand is currently outstripping the supply of qualified contractors. Quanta is projecting "9% to 12%" operating margins for the remainder of the year and I believe the company will come in near the top end of this range.

Overall, the results for the quarter were solid. There was one minor blemish on the quarter with backlog dropping slightly from the $9.0 billion level that I believe will be temporary in nature. As mentioned in my previous article on Quanta, backlog is a key indicator in measuring any contractor's long-term viability and growth potential. CEO Jim O'Neil addressed this issue well in the conference call when he stated:

"the overall trend is that we have the opportunity to be at record levels backlog again. I'm not going to say it's going to be next quarter or the quarter after. It's just difficult for us to predict that because of the timing and nature of awards. The important thing is we're having discussions with customers. We are in their offices. We work for most of the investor-run utilities and Canadian utilities. We know what's in their capital programs going forward. And that leads us to believe that there is certainly opportunity to build backlog from here. But the timing of whether that happens next quarter or this year, into next year, it's just difficult to predict that."

I am not concerned right now with the slight drop in backlog as the timing of when contracts are awarded can create lumpiness in the number quarter to quarter. The important factor is the overall trend in backlog growth and that trend has been up for the last few years.

Recommendation

After the solid second quarter, I reiterate my $42 price target for Quanta by year-end. I would use the weakness in the overall market to accumulate shares of Quanta.

Disclosure: The author is long PWR. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Market Sell-Off Overshadows Quanta Services' Solid Quarter