MasTec: Movin' On Up

Summary

• It was announced that MasTec was added to the S&P MidCap 400 index and the stock jumped on the news.
• MasTec is movin' on up to the MidCap index but, in my opinion, this is only one of the many reasons to stay long the stock.
• I am long MasTec and I am looking to add to my position.
• This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Start your free trial today »

MasTec's (NYSE:MTZ) stock moved higher after it was announced that the company would be included in the S&P MidCap 400 index, which added to the already impressive stock performance so far in 2018.

MTZ data by YCharts

The inclusion in the MidCap 400 index is great news for MasTec (and its shareholders) but let's remember that there are already plenty of other reasons to stay long the stock.

The Bull Case Remains Intact

As I previously described in "MasTec Has Promising Long-term Business Prospects," this small-cap infrastructure company has a great story to tell. Management has consistently talked up MasTec's long-term prospects but, more recently, they have also communicated the fact that the company should benefit from its improving backdrop in the near term too.

Source: MasTec Investor Presentation, November 2018

It also helps that the company's recent operating results support the bull case.

Latest Results

For Q3 2018, MasTec reported better-than-expected adjusted EPS of $1.33 (vs. $1.26 estimate) on revenue of $1.98B. For comparison purposes, the company reported adjusted EPS of $0.82 on revenues of $1.96B in the same period of the prior year.

Source: Q3 2018 10-Q

Operationally, MasTec benefits from several positive trends during the quarter as shown by the fact that all but one business segment reported YoY top line growth.

The Oil & Gas segment had a tough quarter again but, as described by management during the conference call, the segment's pipeline is strong (the O&G backlog increased 148% YoY) and the company is well-positioned for the end of 2018. As such, the next few years is shaping up to be better than the last two years for MasTec's largest operating segment.

Other highlights for the quarter include:

• The quarterly revenue, EBITDA, net income and backlog ($7.8B) were record results for the company.
• The company benefitted to the tune of $0.23 per diluted share from the tax reform bill.
• The company repurchased 1.6M shares during Q3 2018 and the board authorized another $150M of buybacks (the company already completed its previously communicated $100M repurchase plan).
• The Mountain Valley Pipeline issues were resolved and management mentioned that MasTec received approximately $700M of cash in October, which resulted in management increasing their cash flow projections for 2018.

The most important highlight from the quarter, in my mind, was the record backlog because it provides a look-through for what the future could potentially hold for MasTec. The company's 18-month backlog now stands at $7.8B, which is an increase of 56% when compared to the same period of the prior year. That is a meaningful number for a company this size.

Additionally, management raised their full-year 2018 guidance based on the strong Q3 2018 results:

From a valuation standpoint, MasTec is trading at a steep discount based on trailing earnings when compared to peers.

MTZ PE Ratio (Forward) data by YCharts

I believe that MasTec is finally building momentum and that the company is in a position to capitalize on several catalysts - e.g., wireless tailwinds (5G and FirstNet), lower corporate tax rates, and the recovery in the oil and gas industry. As such, the cheap valuation is one of the reasons to stay long the stock but it's not the only reason.

Risks

Investing in small cap companies comes with many risks, but the major risk for MasTec is related to the company's reliance on other companies, and more specifically companies in the telecom space. If these companies cut back their operations and/or outsourcing needs, MasTec's business would be negatively impacted. To this point, management mentioned in the conference call (linked above) that AT&T made up almost 30% of total revenue for the quarter, which goes to show just how important it is to monitor this risk factor.

Moreover, a U.S. recession would have a negative impact on the company's near-term prospects. Please also refer to MasTec's 2017 10-K for additional risk factors that should be considered before investing in the company.

Bottom Line

MasTec is movin' on up to the S&P MidCap 400 index but let's remember that the inclusion in the index is not the only thing going for this small-cap infrastructure company. In my mind, the company's Q3 2018 results show that MasTec's bull case remains intact. Moreover, the company has reported impressive operating results over the last few quarters and management again told investors that MasTec is positioned to benefit from several different industry-specific trends. As such, shareholders should expect great things from MasTec as the company heads into 2019.

I recently added more MTZ shares to the R.I.P. portfolio because, in my opinion, MasTec will turn out to be a great long-term investment at today's price.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long MTZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.