MasTec (MTZ) and Quanta Services (PWR) both build utility scale transmission lines for utilities, natural gas pipelines, and regional and nationwide networks for communication companies. Both firms compete in bidding for projects, and are benefitting from the same long term trends:
- A glut of natural gas is making the resource cheap, and the infrastructure to move the gas around the U.S. needs to be expanded.
- Electric utilities are building out new transmission lines and upgrading older lines, as shifting populations and new smart-grid technology change demands in the industry.
- Utilities also must connect new clean energy projects, like solar panels and wind farms, to the grid, transporting power that is often generated great distances from end users.
- Funds from the American Recovery and Reinvestment Act for nationwide broadband coverage are set to continue to be released in 2011.
- Communication companies like AT&T (T) and Verizon Wireless (VZ) continue to add capacity on their information networks and improve their coverage through building new cell phone towers.
All these factors are positive developments for both companies, and should provide enough work to allow both companies to compete without causing downward pressure on margins. However, a closer look at each company shows that while MasTec is firing on all cylinders, Quanta Services is having some trouble.
MasTec's Q4 report, announced after the bell yesterday, was nothing short of incredible. Setting records in revenue, EBITDA, net income and cash flow for both the quarter and for all of 2010, the company doubled Q4 EPS to $0.44 from a year earlier. That brought 2010 EPS to $1.05 versus $0.90 in 2009. Revenues were $2.3 billion, up 42% YoY, and EBITDA was up 57% to $241 million. Cash flow from operations increased 76% to $218 million. Stripping out the acquisition of Precision Pipeline, organic revenue growth was 24% for the year. EBITDA margin increased 1% to 10.4%, and has increased each of the last four years. MasTec is guiding for 2011 revenues of $2.65 billion, and EPS of $1.20-$1.23, translating to revenue and EPS growth of about 15% each.
Shares spiked above $18 on the report before pulling back slightly below that level today. Based on the midpoint of the EPS guidance, MTZ is trading at a forward P/E of 14.5.
Quanta's report, announced before the bell yesterday, was not as bullish. Revenue for the fourth quarter was $1.1 billion, translating to adjusted EPS of $0.23. Compare that to revenues of $985.4 and adjusted EPS of $0.31 in the year-earlier quarter. Full-year revenues increased 18% to $3.92 from $3.32, but adjusted EPS lagged that gain, up to $0.92, from $0.90. In offering cautious guidance due to what Quanta calls "a challenging business environment in the industries Quanta serves," the company predicts 2011 revenues of $4.1 to $4.4, and adjusted EPS of $0.95-1.05. That translates to 8% revenue and EPS growth. Full-year guidance is weighed down by a slow Q1, with forecasts of revenues between $775 million and $825 million, translating to adjusted EPS or $0.06-0.07.
Shares opened $1.50 lower on the earnings reported yesterday, but climbed back to near breakeven by the end of trade. Shares are currently down 4% today. Based on the midpoint of 2011 adjusted EPS guidance, Quanta is trading at a 21.7 forward P/E.
Quanta cites weather-related delays leading to increased costs in its report, which is not surprising, seeing as almost every U.S. company has cited weather issues distorting the quarter. In its conference call, Quanta reported an 11.8% increase in backlog to $6.3 billion, although the company predicts a slow start to 2011, as it prepares to ramp up construction on several large projects.
While noting that gross margins fell to 14.4% in Q4 from 19.4% the year earlier, management expects to see margin expansion over the next few years, as weakness in the Gas Pipelines segment dissipates. This is interesting because MasTec still managed to beat numbers and improve margins, facing the same industry and weather conditions that Quanta seems so concerned about.
MasTec's CEO was excited about 2011, while Quanta's CEO can be described as cautiously optimistic at best. Perhaps MasTec had more projects that were spared from weather-related issues, but snow managed to cover most of the country at some point or another in the quarter, so I'm not sure this could be the case. A more logical conclusion is that MasTec is outperforming right now, and gaining share on Quanta.
MasTec seems like a better play here, for two main reasons. First and foremost, MasTec is considerably cheaper on a price to earnings perspective, trading at a 14.5 P/E versus Quanta's 21.7. Secondly, MasTec's 15% projected EPS growth rate from 2010 to 2011 is nearly twice as fast as Quanta's 8% rate. While both companies should be benefiting from the same sector-wide developments, it seems MasTec is seeing the greater benefit, and should command a higher price because of it.