Quanta Services: Piggybacking on the Alternative Energy Boom

Quanta Services (PWR) is a contracting services company, delivering infrastructure network solutions for the electric power, natural gas, telecommunications and cable television industries. The company's services include designing, installing, repairing and maintaining network infrastructure nationwide. In other words, it is what one might uncharitably refer to as a “ditch digger”.

Next earnings report due: July/August.

Market cap: $5.8 billion; EV: $5.9 billion

The company is projected to earn $0.90 per share (pro-forma) in the FY ending Dec ’08, and $1.30 next year. Considering it earned $0.80 last year, and organic growth is in the single digit % (or at best low double digits if things go swimmingly well), next year’s earnings estimate seems unusually high. My guess is it will probably earn around $1 per share next year. At the recent price of $33.50, the stock is trading at 37x ’08 EPS. Though the company has reported about $140Mn of net income in the last twelve months, it has generated less than $15Mn of free cash flow in that period. Capex is running well above D&A, and working capital has consumed a good deal of cash (particularly accounts receivable). There seems to be a high bar for any earnings expansion.

The company acquired one of its competitors (InfaSource or IFS) last year. Following the acquisition, it decided to pro-forma out the amortization of intangibles associated with the acquisition. This seems perfectly reasonable, but the company also conveniently decided to pro-forma out stock compensation going forward. This adds a few cents every quarter and year to the EPS, so what it is reporting now is not comparable to what it was reporting last year, and is lower quality earnings.

If you look at the 2 year chart of the stock price, you will see that the stock rose from $20 to the $30s as investors and analysts got optimistic about the IFS acquisition and the resulting synergies. EPS estimates for ’08 went past $1. Then reality set in and the stock went back down to $20. Over the past few months, it has climbed back above $30. The reason now being put forward is that the company is being tagged as an alternate energy company! Why? Because it is doing infrastructure work related to a couple of wind farms. This is a minuscule part of its business, and its work is overwhelmingly related to coal based electric generation and the wireline telecommunications industry.

Fair value $18 (20x calendar ’08 EPS estimate of $0.90).

Also check out my other piece today recommending CRDN as a long.

Disclosure: Author holds a short position in PWR

 

Comments

[echotoall]

good luck with that short, but a bit more understanding to the entire AE boom on your part is needed. AE will encompass a LOT of things. Most importantly, before it can become a reality within the US, the Power Grid needs to get upgraded to handle the extra load.

Then, the Smart Grid will be build. I am not going to spoon feed u the info, but I do suggest you do a LOT more homework as you are short the only pure play to a company very instrumental (in the begining part of the tail) to the AE/smart grid boom.

Currently its a overbought and may need to consolidate some, but that is only technical.

[mope940]

Get ready to cover Gomer! You write an article on PWR and then tell me you are short PBR?? What a dufus!!

[DuBoShi]

I have to agree with the author. I did some digging around as well. To say that it's instrumental for the AE sector is the same as suggesting donkeys are instrumental to worldwide shipping. There are plenty of other companies doing the same thing. It's not the only that will benefit to a very small extent within the next DECADE. For now, this company is showing poor growth even compared to many competitors and I don't have the greatest confidence in the present management either. I went short on this one two days ago for exactly the same reason as described above.

[khwender]

I think you article misses the main point. PWR has a 70% share in high-end voltage projects and very limited competition. It's backlog will grow significantly higher in 08 and 09. The valuation is not high by any measure and the numbers are conservative.

[biz-num]

Can someone teach Ranjit how to make money in a bear market... he obviously doesn't understand the company, the industry, and where we are within the economic cycle of things.

I too refuse to feed Ranjit hard earned information but please spend more time doing HW and less time guessing.

[buffettology]

echotoall and kenw1806 have clearly done their homework - ranjit has not. PWR is now #1 in high-end transmission projects (by virtue of IFS acq), and competition is limited due to industry labor constraints. The driver here is grid upgrades and wind projects, both which require thousands of miles of transmission line. At a recent conference, the CFO said 50% of the projects it is bidding on are wind-related, and he expects wind sales to go from $50 mil last yr to $250-$300 mil this yr. Sure, they're doing "a couple of wind projects" right now, but the stock is already looking ahead to what PWR can do in 2009. Your analysis of their wind business is very backward-looking. I would suggest researching the government's new grid reliability standards and renewables mandates, along with what the Public Utility Commission of Texas (PWR's home state) is doing, and what it all means for PWR's transmission business.

[Maluman]

wow why in the world would the author short PBR...one of the fastest growing stocks out there??

[False Profit]

Thanks to all for your comments. First, to correct a mistake, I am short PWR, not PBR. That was an inadvertent mistake on the part of SA. I agree with some of the qualitative comments that people have put forth, but all of them could have been (and were) made a year ago. Yet, the company has generated only $15Mn of cash in the last year. Not one of you has provided an explanation for this disconnect. My point is simply that a company that generates $15Mn/yr, with no signs of this improving, is not worth $5Bn+.

[Billy Akerman]

I've been following this company since April and have done nicely. My target price for this stock is $45. I'm not sure where you're getting your numbers from, but good luck with your portfolio.
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