From Todd Mitchell's recent note to clients on MasTec's (NYSE:MTZ) recent pre-announcement of 4Q06 results and 2007 guidance.
MTZ: PREANNOUNCES 4Q06, GIVES GUIDANCE FOR 2007
• MasTec pre-announces 4Q06 results and gives 2007 guidance. A little good, a little bad; 2007 guidance is in line with expectations, and implies double digit revenue growth and 30% to 50% EPS growth, 4Q06 revenue is also in line, but EPS of $0.14 to $0.16 is approximately $0.06 to $0.04 light. Management attributed this shortfall to a number of factors, including a ramp in its DTV business. EPS guidance refers to GAAP results from continued operations. We would view any weakness in the stock price as a result of the 4Q06 EPS shortfall as a buying opportunity.
• Revenue and EPS in 2007 are expected to be in line with estimates. Management is guiding to 2007 revenue of $1.04 billion to $1.06 billion, which would imply 10% to 12% growth, and compares favorably to our $1.03 billion estimate. Management expects EPS to be $0.80 to $0.90, which would be a 30% to 50% increase from 2006 levels, and is in line with our estimate of $0.90. Management commented that, unlike previous years, guidance for 2007 does not include storm related revenues.
• Revenue to be in line in 4Q06, but EPS to be about $0.04 light. Management is guiding to 4Q06 revenue of $237 million to $242 million, which is slightly higher than our $235 million estimate, and would imply 6% to 8% growth for the quarter, and 10% to 11% for the year. EPS for the quarter is now expected to be $0.14 to $0.16, which is about $0.06 to $0.04 light of guidance of $0.18 to $0.20, and compares to our estimate of $0.20. Guidance implies EPS for the year of $0.60 to $0.62 versus our estimate of $0.66.
• Modest shortfall in 4Q06 EPS likely due to ramp in DTV business. Management attributed the shortfall in 4Q06 EPS to four factors: 1) hiring 800 new DTV installers during the quarter, 2) losses on exiting two energy contracts, 3) a $2.5 million increase in legal expenses versus 4Q05, and 4) a $1.9 million increase in stock compensation charges. Given the earlier visibility on the last three of these items, we think the ramp in the DTV business is likely the cause of most of the shortfall versus expectations in 4Q06.
• New management is likely being conservative with early guidance. This guidance, which was issued in conjunction with the company efforts to sell $150 million in debt, is the first act of MasTec's new CEO, Jose Mas, and as such we believe is likely conservative both in terms of 4Q06 EPS and 2007 top-line growth. Management has commented that it has not built any storm related revenues into its 2007 forecast, given its absence in 2006. However, we believe the lack of storm revenue in 2006 was likely a historical anomaly.
• We view any weakness in MTZ today as a buying opportunity. Given MasTec repeated issues with margin performance in 2006, shares of MTZ could suffer today from downside to 4Q06 EPS estimates. We would view 4Q06 as the final flush. Given management's endorsement of strong gains in 2007, and the likelihood that guidance is conservative in nature, we believe any weakness in shares of MTZ today as a result creates a buying opportunity.
• We reiterate our $14 price target and BUY rating on shares of MTZ. We value MTZ at $14 per share based on a DCF model that utilizes a terminal year of 2010, a terminal multiple of 16.2x and a discount rate of 9.7%. However, it is perhaps easier to think of our target in terms of 15.0x 2007E EPS of $0.90. We view investment in MTZ as moderately risky given that the company is a bit of a turnaround story which has yet to complete its turnaround.