Company Overview: Quanta Services, Inc. (NYSE: PWR) is a specialized contracting services company, which delivers infrastructure solutions for the renewable energy, communications, utility, pipeline, and energy industries. PWR’s comprehensive services involve installing, designing, maintaining, and repairing energy, and communications infrastructure.

­­­­­­PWR Details

Material Business Updates

Figure 1: Valuable Business Updates

Source: Analysis by Kalkine Group

Historical Financial Trend:

PWR illustrated sustainable historical growth while keeping the value proposition intact. The operating revenues have been growing since FY16 until COVID-19 disruptions struck in FY20 while gross profit kept on holding a growing phase. Operating revenues grew at a 10.0% CAGR (FY16 – FY20).

Figure 2: Historical Financial Overview

Source: Company Reports, Analysis by Kalkine Group

Third Quarter FY21 Performance:

Figure 3: Quarterly Performance

Source: Company Reports, Analysis by Kalkine Group

Full-Year FY20 Performance:

Figure 4: Annual Performance

Source: Company Reports, Analysis by Kalkine Group

Top 10 Shareholders:

The top 10 shareholders together form ~38.77% of the total shareholding. The Vanguard Group, Inc. and Fidelity Management & Research Company LLC hold a maximum stake in the company at ~10.34% and ~5.67%, respectively.

Figure 5: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Metrics:

Consistent growth in sales volume across electric power infrastructure solutions and underground utility and infrastructure solutions has translated into long-term sustainable growth levels. Despite bouncing revenue in FY20, PWR demonstrated substantial operational efficiency at an aggregate level, highlighted by steady growth in gross margins. On liquidity, the company managed steady current ratio in FY20 over the prior year.

Figure 6: Key Financial Metrics

Source: Analysis by Kalkine Group

Outlook:

Meaningful Accretion from Blattner Acquisition: PWR expects Blattner Holding Company to improve its financial profile. For FY22, PWR estimates a revenue inflow of US$2.5-2.7 billion from Blattner and an adjusted EBITDA contribution of US$250-290 million.

Electric Power Infrastructure Solutions Segment: PWR’s joint venture with ATCO has opted for the operation, maintenance, and development of electric transformation & distribution systems in Puerto Rico, and other affiliates.

Underground Utility and Infrastructure Solutions Segment: FY21 revenue expectations are slightly moderated, owing to shredded revenues. Segment margins are expected to range between 4.5% and 5.0%, including the unfavorable impact of $23.6 million credit loss, affecting nearly 70 bps.

Figure 7: FY21 Guidance

Source: Analysis by Kalkine Group

Key Risks:

High Competition: PWR operates in a highly competitive space with other contractors. Additionally, barriers to entry are low which makes organizations with technical expertise and financial resources a potential competitor.

Increased Revenue Volatility: Post COVID-19, the market dynamics have changed which has crunched the operating margin and substantially affected pipeline projects, adversely affecting the bottom line.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Stock Recommendation:

PWR has delivered 3-month and 6-month returns of ~-6.755% and ~+19.592%, respectively. The stock is trading above the average of the 52-week low price of US$69.84 and the 52-week high price of US$124.69, indicating a trending opportunity. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), considering meaningful accretion from the Blattner acquisition and favorable guidance. For valuation, a few peers like Dycom Industries Inc (NYSE: DY), Valmont Industries Inc (NYSE: VMI), Comfort Systems USA Inc (NYSE: FIX), have been considered. Given the continuous uptick in renewable energy infrastructure demand, high investment and strategic insight for technological growth, favorable guidance for operating margin, the current trend in the equity market, and potential upside as indicated by the valuation, we give a “Buy” recommendation on the stock at the current market price of US$105.02 as of 18 January 2022, at 10:24 AM (GMT+5), New York, USA.

PWR Daily Technical Chart (Source: REFINITIV)

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and is subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.