Quanta Services: Piggybacking on the Alternative Energy Boom

Jun.19.08 | About: Quanta Services (PWR)

Quanta Services (NYSE: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