MasTec: The Risk Is Currently To The Upside

Summary

• MasTec recently reported better-than-expected Q3 2020 earnings and management provided solid Q4 2020 guidance.
• The company's quarterly operating metrics were well-received by the market, and I believe that MasTec is well-positioned for 2021 and beyond.
• We are long MasTec, and we plan to add to our position on any significant pullbacks.

MasTec (NYSE:MTZ) is a small-cap infrastructure construction company that has been negatively impacted by the disruptions of the global pandemic. The company reported lackluster operating results over the first half of 2020, so it should come as no surprise that MasTec's stock has underperformed the broader market by a wide margin.

However, as shown, MTZ shares have performed well since the March/April 2020 lows. And looking forward, there is a lot to like about this company as I believe that the significant underperformance has created a buying opportunity for investors that are interested in a company that has great long-term business prospects.

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The Latest

On October 29, 2020, MasTec reported Q3 2020 operating results that beat on the bottom-line but that missed the consensus top-line estimate. The company reported adjusted EPS of $1.59 (beat by $0.15) on revenue of $1.69B (missed by $240M), which were impressive results given the backdrop. However, the operating results do not compare favorably to the year-ago quarter.

Source: Q3 2020 Press Release

Highlights from the quarter:

• Revenue fell by ~16% YoY with the Oil & Gas (-52%) segment being the biggest contributor to the company's top-line decline;
• Adjusted EBITDA increased by ~5% YoY (to $264.8mm) -- it should be noted that the non-Oil & Gas segments reported a ~83% YoY increase in adjusted EBITDA;
• The company reported record cash flows from operations (more on this below); and
• The 18-month backlog now stands at $7.7B.

There was a lot to like about MasTec's Q3 2020 results but it is also important to note that the Oil & Gas segment continues to be a major drag.

Source: Q3 2020 Press Release

The Oil & Gas segment's revenue and adjusted EBITDA were down 52% and 25%, respectively. Management still contends that the disappointing Oil & Gas results are largely related to timing of several projects that were pushed back to 2021; however, I believe that the headwinds for this industry will continue through at least 2021.

But it does help the bull case that management was able to still guide for a pretty strong finish to the current year even with the Oil & Gas headwinds (updated Q4 2020 guidance):

• Revenue in the range of $1.7B-$1.9B (although management gave themselves an out by saying that timing could again negatively impact the Oil & Gas segment's top-line results)
• Adjusted EPS in the range of $1.64-$1.73 and adjusted EBITDA in the range of $252mm-$263mm

Additionally, looking out further than the next few months, I believe that MasTec is well-positioned for 2021 and beyond. The 5G rollout continues to be the catalyst [for example, IHS Markit predicts that companies in the 5G value chain will invest an average of $235B annually through 2035 to expand (and rollout) 5G technology] but there are several other catalysts that also have the potential to propel MasTec's stock price higher over the next 2-to-3 years.

Source: DADCO Virtual Conference Presentation, 9/22/2020

And while it is looking less likely that a significant infrastructure bill will be passed in the near future, I still believe that MasTec has great long-term business prospects.

The Financials, By The Numbers

A detailed review of a company's financial statements can provide a tremendous amount of value if the reader can decipher the information. The income statement reveals the company's ability to generate a profit and how it performed over a specific period of time. Investors are able to figure out how a company is positioned, financially, from a review of the balance sheet. And lastly, the cash flow statement shows how a company managed its cash position and how exactly it generated cash to fund its operations.

Below are my takeaways from MasTec's most recent financial statements:

Income Statement

Source: Q3 2020 10-Q

Observations (all for the 9 months ended September 30):

• Net sales and cost of revenue were down 14% and 15%, respectively - i.e., management was able to reduce the cost base in line with the reduction in sales
• Interest expense is down 22% (the company recently refinanced its debt)

The takeaway: the company's operating results were impacted by the economic disruptions related to the pandemic but management has been working to cut out costs. And on a positive note, management was able to refinance MasTec's debt which will help with lower interest expenses in the years ahead.

Balance Sheet

Observations:

• The current ratio is over 1.5
• The net debt balance is $1.26B (down by $330mm or 21% YoY)

The takeaway: MasTec has a decent balance sheet (I would like for the debt balance to be significantly lower) that should allow for the company to weather any near-term storms.

Cash Flow Statement

Observations:

• The company was able to report record cash flows from operating activities ($712.4), which is extremely bullish in this tough operating environment
• The company paid $16mm less in interest
• The company continues to be a buyer of the stock (although I think management needs to now focus on keeping cash on hand instead of repurchasing shares)

The takeaway: the cash flow metrics show that most of the company's businesses are firing on all cylinders from a cash generation standpoint, even in a challenging environment. Moreover, the cash flow statement shows that MasTec has more-than-enough capacity to service its large debt balance.

Putting It All Together

MasTec's financials show that its businesses were negatively impacted by the economic slowdown caused by COVID, especially the Oil & Gas industry, but that the company has a strong enough balance sheet to weather the current downturn. And the company's cash generation was actually stronger than what I expected in this environment, which is extremely bullish. At the end of the day, a review of MasTec's financials did not have a material impact on the company's long-term story, in my opinion.

Valuation

MasTec's stock is attractively valued based on its own historical metrics.

Source: Morningstar

Additionally, MTZ shares are trading at a deep discount when compared to its peer group.

MasTec is definitely a cyclical company that will go as the economy goes, but when taking everything into consideration (i.e. strong operating results for the non-Oil & Gas segments, a more diversified business and a manageable balance sheet), it is hard not to like MTZ shares at current levels.

Risk

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 15% of total revenue in Q3 2020, which goes to show just how important it is to monitor this risk factor. However, I will note that the revenue concentration with AT&T has continued to decline over the years (for example, AT&T accounted for over 20% of MasTec's total revenue in fiscal 2018).

Moreover, the COVID-19 related recession will have a negative impact on the company's near-term prospects - the real risk revolves around how long the recession lasts. Please also refer to MasTec's 2019 10-K for additional risk factors that should be considered before investing in the company.

Bottom Line

MasTec's Q3 2020 operating results and management's updated guidance prove that this small-cap company is well-positioned for the future. This company has several significant tailwinds (FirstNet, 5G rollout, Clean Energy play, etc.) that could potentially make the bull case even stronger in 2021. As such, I believe that MasTec has promising long-term business prospects.

MasTec's stock will definitely go as the economy goes, so I expect the next few quarters to be a bumpy ride, but in my opinion, the risk over the long term is currently to the upside. Therefore, investors with a time horizon longer than 2-3 years should consider significant pullbacks as long-term buying opportunities.

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.