MasTec: Still Worthy Of Investment Dollars

Summary

• MasTec reported strong Q3 2019 results that beat the bottom-line estimates. Additionally, management raised their earnings guidance for full-year 2019.
• I believe that MasTec's stock is still trading at attractive levels and that the company is well-positioned for 2020 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.. Get started today »

MasTec (NYSE:MTZ) reported strong Q3 2019 results, and the market liked what it heard, as shown by the fact that MTZ shares shot up by almost 9%. On a YTD basis, MTZ shares are now outperforming the broader market by a very wide margin.

Data by YCharts

The solid stock performance so far in 2019 has been nice but, in my opinion, MasTec is still worthy of investment dollars even after the recent run-up. And it helps the bull case that the Q3 2019 results show that this small-cap infrastructure company still has promising business prospects.

The Latest, The Bull Case Keeps Getting Stronger

On October 31, 2019, MasTec reported Q3 2019 operating results that beat the bottom-line estimates but that fell a little short on the top-line. The company reported quarterly GAAP EPS of $1.69 (beat by $0.12) on revenue of $2.02B (missed by $120M), which also compares favorably to the year-ago quarter.

Source: Q3 2019 Press Release

Highlights from the quarter:

• Revenue grew by ~2% YoY with the Communications and Power Generation and Industrial ("Power") divisions being the biggest contributors
• Adjusted EPS increased by 110% YoY (from $1.55 to $1.71) and the adjusted EBITDA came in at $252.1M (an increase of $25.8M or 11.5%, from the year-ago quarter)

There was a lot to like about MasTec's Q3 2019 results, but I believe that the most important takeaway is the fact that the company still has a significant catalyst in place when it comes to 5G. Management actually referred to 5G deployment as one of the biggest business opportunities in MasTec's history.

The company announced a small tuck-in acquisition (QuadGen Wireless), which allows for MasTec to become a more of an end-to-end service provider in the space. I have long believed that 5G is a game-changer for MasTec and it seems like the pieces are starting to fall into place. 2020 should be a great year for the Communications division.

In a broader context, management highlighted their great visibility into their businesses. They remain bullish about the growth prospects for several operating units and, as a result, management updated their full-year 2019 guidance.

Source: Seeking Alpha, MasTec Q3 Update

And speaking of great visibility, the company's 18-month backlog now stands at $7.5B at the end of Q3 2019.

The top-line headwind (notice the lowered revenue guidance) is related to regulatory delays on one large oil and gas project, but it is important to note that management believes that this is only a timing issue (i.e., the project will now fall into 2020 instead of 2019).

From an earnings perspective, management likes what they have seen so far in 2019. For example, the Oil and Gas segment's adjusted EBITDA margin was 21.9% for Q3 2019, which is significantly higher than the 15.9% reported in the same period of the prior year. The margin expansion was a result of a positive combination of project mix with lower levels of project costs and, importantly, management anticipates this trend to continue into 2020.

It also helps the bull case that MTZ shares are trading at an attractive valuation.

Valuation

MasTec's stock is still attractively valued when compared to its peer group even after the recent run-up.

Data by YCharts

I do not believe that all of the company's long-term business prospects are fully baked into the stock, especially if the full-year 2019 guidance is achieved.

Let's also not forget that management repurchased 7.2M shares in 2018 that 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 that AT&T made up almost 18% of total revenue in Q3 2019 (down from 25% for full-year 2018), 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

MasTec's Q3 2019 results (and management commentary) were well-received by the market, and rightfully so. Simply put, this company continues to show investors that MTZ shares are worthy of investment dollars. It may be a bumpy ride for MTZ shareholders in the months ahead if the broader market pulls back, but, looking out, I believe that there is a lot to like about how this company is positioned. As such, investors with at least an 18-24 time horizon should treat any significant pullbacks as buying opportunities.

Author's Note: I hold a MTZ position in the R.I.P. Portfolio, and I have no plans to reduce my stake.

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.