MasTec's 2018 Results: A Lot To Like Here

Summary

• MasTec reported Q4 2018 results that beat the top- and bottom-line estimates. Additionally, management raised their forward guidance due to the company's strong business prospects for 2019.
• I believe that MasTec's stock is trading at attractive levels and that the company is well positioned for 2019 and beyond.
• I'm long MTZ shares and I have no plans to reduce my stake in the near future.
• 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 (NYSE:MTZ) reported blow out Q4 and full-year 2018 results, and the market liked what it heard, as shown by the fact that MTZ shares shot up by more than 8%. However, let's not get too excited because MasTec's stock is still underperforming the broader market by a wide margin over the last 52 weeks.

Data by YCharts

I recently provided three reasons why I thought that investors should stay long MasTec in a December 2018 article (i.e., the growing backlog, the capital return potential, and a change in investor sentiment) and, in my opinion, the Q4 and full-year 2018 results show that this small-cap infrastructure company still has promising business prospects. As such, investors with a time horizon longer than 2-to-3 years should seriously consider staying the course.

The Latest, A Lot To Like Here

On February 28, 2019, MasTec reported Q4 2018 operating results that beat the top- and bottom-line estimates. The company reported adjusted quarterly EPS of $1.07 (beat by $0.01) on revenue of $1.92B (beat by $20M), which also compares favorably to the year-ago quarter.

Source: Q4 and Full-year 2018 Earnings Press Release

Highlights from the quarter:

• Revenue grew by ~20% YoY - as shown, the Oil & Gas ("O&G") and Power Generation and Industrial ("Power") segments were major contributors to the company's top-line growth.
• Adjusted EPS increased by 127% YoY (to $1.07 from $0.47) and the adjusted EBITDA margin came in at 10.2% (an increase of 220 bps from the year-ago quarter).

2018 was a good year for MasTec (you could easily replace "good" with "great," in my opinion). However, the bears have raised a valid concern in that MasTec's O&G segment had a blow-out year in 2018 and that it's going to be hard to repeat that type of success in 2019. But, as management described during the conference call, the oil and gas industry's prospects have actually improved over the last few quarters and MasTec only expects for the segment's top-line to grow in the mid-single digit range. Additionally, management believes that they have "excellent multi-year visibility on project activity" and they also anticipate strong business coming from the ever-growing pipeline activity. While the bears have raised what I would consider a valid concern, I do not see the O&G segment derailing management's 2019 plans because they have this small-cap infrastructure company in a great position for the next few years (i.e., MasTec has more going for it than just a recovery in the oil and gas industry).

To this point, it's important to note that MasTec not only reported strong results for the last three months of 2018, but instead, the company's full-year results also were noteworthy. For example, MasTec reported record annual revenue of $6.9B (up 4.6% YoY) and record cash flows from operations of $530M (up 267% YoY), in addition to ending the prior fiscal year with an 18-month backlog of $7.7B (up 9% YoY, and yes, another record). What's not to like about what MasTec was able to accomplish in 2018?

And more importantly, management expects for this company to have another strong year in 2019:

2019 guidance represents revenue of $7.6 billion, increased GAAP diluted earnings per share of $4.20, adjusted diluted earnings per share of $4.34 and adjusted EBITDA of $780 million.

If achieved, that would mean that MasTec will report revenue and adjusted EPS growth of 10% and 15%, respectively, in the current year. The future looks bright.

Valuation

MasTec's stock is attractively valued when compared to its peer group.

Data by YCharts

Moreover, MTZ shares are trading at attractive levels when compared to the company's own historical metrics.

Data by YCharts

Additionally, I do not believe that all of the company's long-term business prospects are fully baked into the stock, especially if the 2019 guidance is achieved. As I recently described, MasTec has a great story to tell and the bull case gets better, in my mind, if you factor in the promising 2018 financial results/growth metrics and management's impressive guidance.

Lastly, let's not forget that management repurchased 7.2M shares in 2018 for $319M, which represented ~9% of the shares outstanding at the beginning of the prior year. Simply put, management is rewarding you for being patient as they appear to be laser focused on returning capital to shareholders.

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 23% of total revenue for 2018 (down from 25% and 34% in 2017 and 2016, respectively), 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 2018 10-K for additional risk factors that should be considered before investing in the company.

Bottom Line

There's a lot to like about MasTec at today's valuation, especially after reviewing the company's strong Q4 and full-year 2018 results. Long-term investors will be richly rewarded, in my opinion, if the company's story plays out like I believe that it will. This company has several significant tailwinds (FirstNet, 5G rollout, O&G recovery, Power stabilization, etc.) that could potentially make the bull case stronger over the next few quarters. As such, I believe that MasTec has promising long-term business prospects.

At the end of the day, MasTec's stock will go as the economy goes so any type of market meltdown will likely negatively impact MTZ shares. But, in my opinion, the risk is currently to the upside. Therefore, investors with a time horizon longer than 2-to-3 years should consider significant pullbacks as long-term buying opportunities.

Author's Note: I hold a MasTec position in the R.I.P. portfolio, and I have no plans to sell any of my MTZ shares in the near future.

Additional disclosure: 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.