MasTec (NYSE:MTZ) has been working to diversify away from the oil and gas pipeline business with two acquisitions in 2021. MasTec announced the largest takeover in its history, buying Henkels & McCoy for $600 million. The purchase of Henkels, which specializes in electrical power transmission and distribution services, marked a significant change in the MasTec’s revenue structure. MasTec expects power transmission and distribution revenue to surpass fossil fuel pipeline income for the first time in the company’s history.
MasTec also acquired INTREN, another utility services provider specializing in electrical distribution network services. In its announcement of the purchase, MasTec reinforced the need to grow its electric utility transmission business as the country works to improve the infrastructure needed to power the growing number of electric vehicles.
When considering these current stories about MasTec, we need to determine which news topics will have a long-term and ongoing effect on the company and its share price. The strategic transition of MasTec’s operating revenue away from oil and gas and toward renewables will have a long-term impact on both expenditures and income.
While current news stories, good or bad, can sway our opinion about investing in a company, it's good to analyze the fundamentals of the company and to see where it's been in the past and in which direction it's heading.
This article will focus on the long-term fundamentals of the company, which tend to give us a better picture of the company as a viable investment. I also analyze the value of the company versus the price and help you to determine if MTZ is currently trading at a bargain price. I provide various situations which help estimate the company's future returns. In closing, I will tell you my personal opinion about whether I'm interested in taking a position in this company and why.
A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer’s company rating score. It shows a score of around 71/100. Therefore, MasTec is considered to be a good company to invest in, since 70 is the lowest good company score. MTZ has high scores for 10 Year Price Per Share, ROE, and Ability to Recover from a Market Crash or Downturn. It has mediocre scores for Earnings per share, and ROIC. It has low scores for Gross Margin Percent, and PEG Ratio. A low PEG Ratio score indicates that the company may not be experiencing high growth consistently over the past 5 years. In summary, these findings show us that MTZ seems to have above average fundamentals.
Before jumping to conclusions, we’ll have to look closer into individual categories to see what’s going on.
Let’s examine the price per share history first. In the chart below, we can see that price per share has been mostly consistent at increasing over the last 10 years, with the exception of 2016 and 2021 where share price declined. Overall, share price average has grown by about 411% over the past 10 years or a Compound Annual Growth Rate of 19.87%. This is an impressive return for this period.
Looking closer at earnings history, we see that earnings haven’t grown consistently over the past 10 years. Earnings grew marginally from 2011 to 2013. Earnings then dipped slightly in 2014 before the company posted an earnings loss in 2015. EPS rebounded in 2016 and 2017 before falling again in 2018. While earnings recovered in 2019, they decreased again in 2020. MasTec's fluctuating earnings can, in part, be explained by the revenue streams the company depends on for earnings.
The company has been moving to quickly diversify away from being primarily an oil and gas business, which is an industry that is notoriously linked to the volatility of energy prices. The dip in 2015 that resulted in MTZ’s earnings loss corresponds with a sharp dive in oil prices that lasted through much of 2016. As oil prices rebounded, so did MTZ’s earnings. Consistent earnings make it easier to accurately estimate the future growth and value of the company. So, in this regard, MTZ is not a good candidate of a stock to accurately estimate future growth or current value.
Since earnings and price per share don’t always give the whole picture, it’s good to look at other factors like the gross margins, return on equity, and return on invested capital.
The return on equity has been inconsistent with significant swings between 2016 and 2020. ROE more than doubled between 2016 and 2017 before falling in 2018. An increase in 2019 was followed by another drop in 2020. Noting the swings in ROE, it can be more reliable to focus on ROE figures for the entire period. Five-year average ROE is satisfactory at around 20.1%. For return on equity (ROE), I look for a 5-year average of 16% or more. So, MTZ meets my requirements.
Let’s compare the ROE of this company to its industry. The average ROE of 48 Engineering & Construction companies is 6.48%.
Therefore, MasTec’s 5-year average of 20.1% and current ROE of 17.04% are well above average.
The return on invested capital has also been inconsistent. While ROIC increased in 2017 and 2019, it decreased in 2018 and 2020. Five-year average ROIC is subpar at around 12.1%. For return on invested capital (ROIC), I also look for a 5-year average of 16% or more. So, MTZ fails this test.
The gross margin percent ((GMP)) has been mostly stable and, with the exception of 2017, has been increasing over the last five years. Five-year GMP is below expectations at around 14.5%. I typically look for companies with gross margin percent consistently above 30%. So, MTZ has demonstrated it does not have the ability to maintain acceptable margins over a long period. However, on the positive side, have been improving for the most recent 3 years.
Looking at other fundamentals involving the balance sheet, we can see that the debt-to-equity is less than 1. This is a good indicator, telling us that the company owns more than it owes.
MTZ’s Current Ratio of 1.52 is satisfactory, indicating that it has an adequate ability to use its assets to pay its short-term debt.
Ideally, we’d want to see a Current Ratio of more than 1, so MTZ exceeds this amount.
According to the balance sheet, the company appears to be in good financial health. In the long term, the company seems stable in regards to its debt-to-equity. In the short-term the company’s financial situation is also on solid footing.
The Price-Earnings Ratio of 18 indicates that MTZ might be selling at a high price when comparing MTZ’s PE Ratio to a long-term market average PE Ratio of 15. The 10-year and 5-year average PE Ratio of MTZ has typically been between 15.9 and 15.4, so this indicates that MTZ could be currently trading at a high price when comparing to MTZ’s average historical PE Ratio range.
MTZ does not currently pay a regular dividend.
This analysis wouldn’t be complete without considering the value of the company vs. share price.
For valuation purposes, I will be using a diluted EPS ttm of 4.45. I’ve used various past averages of growth rates and PE Ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity.
In the table below, you can see the different scenarios, and in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is towards the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.
According to this valuation analysis, MTZ is overpriced.
This analysis shows an average valuation of around $63 per share versus its current price of about $77, this would indicate that MasTec, Inc. is overpriced.
According to the facts, MasTec is financially healthy in a long-term sense of having enough equity as compared with debt, and it’s also stable in the short-term because the current ratio indicates that it has enough cash to cover current liabilities.
Fundamentals such as EPS and ROE are at good levels. ROIC and Gross Margins could use improvement. As a whole, the fundamentals of this company are inconsistent, but this is somewhat common for stocks that are in the energy/oil industry.
Lastly, this analysis shows that the stock is overpriced.
Next, we will examine how MTZ has performed in the long-term, when compared to the US stock market benchmark of the S&P 500. From the chart below, we can see that MTZ has outperformed the S&P 500 for the majority of the time. This is good news, because a shareholder could experience better gains than holding an S&P 500 index fund.
However, MTZ is very volatile. Therefore, it is of utmost importance to buy the stock at a bargain price, so that you can capitalize when the stock surges in price. This is not the type of stock that you want to buy when it’s overpriced, as this can result in a great loss when the stock plummets back towards and possibly under its real value.
“Over the next five years, the analysts that follow this company are expecting it to grow earnings at an average annual rate of 9.93%. (Source: Forecast Earnings Growth)
Here is an alternative scenario based on MTZ’s past earnings growth. During the past 10 and 5-year periods, the average EPS growth rate was about 13.01% and 1.07%, respectively.
But when considering book value growth over the past 10 and 5 years, the growth has been 10% and 13%, respectively. Therefore, when averaging these growth possibilities, our annual return could realistically be around 9%-10%.
If considering actual past results of MasTec, the story is a bit different. Here are the actual 10 and 5-year return results.
10 Year Return Results if Invested in MTZ:
Initial Investment Date: 3/3/2012
End Date: 3/3/2022
Cost per Share: $18.94
End Date Price: $50.51
Total Return: 305.76%
Compound Annualized Growth Rate: 15%
5 Year Return Results if Invested in MTZ:
Initial Investment Date: 3/3/2017
End Date: 3/3/2022
Cost per Share: $40.80
End Date Price: $76.85
Total Return: 88.36%
Compound Annualized Growth Rate: 13%
From these scenarios, we have produced results from 13% to 15%. I feel that if you’re a long-term patient investor and believer in MTZ, and its existing products (communications, energy, and utility infrastructure), you could expect MTZ to provide you with around at least 9% annual return with more significant returns in the mid-teens being realistic. There is even a possibility of returns in the 20% range if you are able to buy at a bargain price.
For me, the choice is certain. I would take an objective look at this company and realize that MasTec is a chance to own a diversified company with multiple operating segments (Communications, Oil and Gas, Electrical Transmission, Clean Energy and Infrastructure) mainly in North America. These business segments are viewed as necessities. In essence, this company provides real value to people and businesses every day. When you turn on lights at your house, connect to the internet, use oil or gas, or even make a phone call, MasTec has likely played an integral part in making that happen. This type of valuable company is certainly needed and has plenty of room to grow. As a shareholder, this stock will keep you on your toes with its volatility. Like the industries that it operates in, the stock price and fundamentals fluctuate.
But as long as you’re sure to buy this company at a discounted price, you won’t have much to worry about. I’m interested in adding MasTec to my portfolio, but not until the price falls to a level below the estimated value. According to my valuation analysis, MasTec would need to come down in price to $60 or below before I consider buying it.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.