Is Quanta Services Stock A Buy After Texas Power Crisis?

Quanta Services (NYSE: PWR), a provider of infrastructure services for electric utilities, is likely to benefit following the widespread electricity outages in Texas this month. The blackout was caused by extremely cold weather that resulted in surging power demand as key generation sources went offline. Now, the crisis has brought the focus back to aging electrical infrastructure and the years of inadequate investment in the power grid in the United States. Although grid modernization has been on the agenda for a while, regulators and utilities are now likely to carry out upgrades with more urgency, causing demand for services provided by the likes of Quanta to rise.

While Quanta stock is already up by about 10% thus far in February, trading at about $78 per share currently, the stock is still valued at under 19x forward earnings, a reasonable valuation considering the company’s growth potential. Some other trends that could help the stock include the Biden Administration’s renewable energy push, increasing capital expenditures by utility companies, and a growing trend of outsourcing among U.S. utilities, partly due to aging work forces. See our analysis on Why Is Quanta Services Stock Up 158% Since 2018? for more details on how Quanta’s revenues, margins, and valuation multiple have trended in recent years.

[2/1/2021] Is Quanta Stock A Good Value Pick?

Quanta Services (NYSE: PWR), a company that provides contracting services for electric utilities as well as the pipeline, industrial, and communications industries, has seen its stock move sideways, since our last update in November, currently trading at levels of around $70 per share. We think the stock looks like a reasonably good value bet, considering that it trades at just about 19x projected 2021 earnings, with growth likely to pick up in the coming years.

While the company has a steady base of revenues from helping electric utilities and customers in the oil and gas space maintain or expand their operations, there could be a couple of growth drivers in the near-term. Firstly, the Biden presidential administration is expected to invest significantly in renewable energy and energy conservation. Quanta should be able to capitalize on this, as it has increasingly been providing design and development services for wind and solar projects, and is also a leader in smart grid technology. Moreover, there is a growing trend of outsourcing among U.S. utilities, partly due to aging workforces and this should also help Quanta. The company could also see some tailwinds from the continued deployment of 5G in the U.S., as the small cells for 5G networks are likely to need to utilize electric distribution infrastructure to co-locate antennae at the top of power poles, calling for services provided by the likes of Quanta. See our analysis on What Has Driven Quanta Services Stock Over The Last 3 Years? for more details on how Quanta’s Revenues, margins, and valuation multiple have trended in recent years.

[11/23/2020]

Quanta Services (NYSE: PWR), a company that provides contracting services for electric utilities as well as the pipeline, industrial, and communications industries has seen its stock price rise by about 62% year-to-date and has recovered by about 180% from its March lows, as its electric power business held up well, despite the Covid-19 pandemic, with recent quarterly results also coming in stronger than expected. Could the stock trend higher still or is it poised for a decline? We think Quanta is a reasonably good bet at current levels, for a couple of reasons, which we outline below.

What Has Driven Quanta’s Performance Over The Last Few Years?

Quanta stock is up by about 125% since early 2018. Let’s take a look at Quanta’s performance over the last few years for a sense of how the company has been faring and what has driven its stock price gains. Revenues rose at an annual rate of about 13% between 2017 and 2019, rising from around $9.5 billion to about $12.1 billion, driven by a growing customer base as well as higher business from large existing clients as well as some acquisition at both its electrical power business (which accounts for about 60% of total Revenue) and pipeline and industrial segments (about 40%  of total Revenue). The company’s margins remained largely flat at about 3.4% between 2017 and 2019, with Net Income growing from about $318 million to $407 million. EPS grew faster than Net Income, rising from about $2.02 to $2.76 per share between 2017 and 2019, driven by share repurchases. Quanta Services P/E multiple has jumped from levels of about 19.4x in 2017 to about 24.5x currently, likely driven by higher valuations across the market, and a preference for companies with relatively asset-light business models. What Has Driven Quanta Services Stock Over The Last 3 Years?

What’s The Outlook Like For Quanta Services?

While Quanta’s sales are likely to decline this year, due to the Covid-19 pandemic and associated disruptions to the Capex of some customers, particularly in the Pipeline and Industrial Infrastructure Services space which has been impacted by a weak energy market, the company is likely to return to growth next year. There are multiple factors that could drive Quanta’s growth in the medium-term. Firstly, the incoming Biden administration is expected to be very positive for renewable energy and this is likely to drive electrical infrastructure spending, helping Quanta. Transmission and distribution, in particular, is likely to be a big area for growth, with Capex by North American utilities likely to rise by about 35% for the next three years 2020 to 2022, versus the preceding three years. ^[1]  Moreover, there has been a growing trend of outsourcing among U.S. utilities, partly due to aging workforces and this should also help the company.

We believe Quanta stock remains a good bet at current levels, given its growth potential, good revenue visibility (considering the multi-year Capex plans of utilities), and relatively asset-light business model.  The company currently trades at about 25x 2019 earnings, well below the S&P 500 which trades at about 36x, and the broader utility sector which trades at around 24x trailing earnings, despite being slower growing and more capital intensive. ^[2]

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1. Company Presentation, Quanta Services [↩]
2. PE Ratio By Sector, NYU Stern [↩]