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Infrastructure construction and engineering small cap MasTec
on Monday announced second-quarter earnings that were in
line with its reduced guidance and met analyst expectations --
though only after the latter projections were drastically
lowered in recent weeks.
Earnings continue to struggle
MasTec reported a quarterly net earnings decline of 12% on a
year-over-year basis, from $0.42 per share to $0.37 per share.
This was on top of the prior quarter's 28% year-over-year
decline. Analysts had expected that$0.37 per share figure;
however, the estimate had been lowered by 26% in recent months
following revised guidance from the company.
Revenue was up 13% to $1.1 billion thanks to 23% growth in the
company's oil and gas segment and 49% growth in power
generation. During its
first-quarter conference call, management had guided
for $1.15 billion to $1.2 billion in sales, but the company in
June lowered that figure to $1.1 billion due to expectations of
weakness in its wireless and oil and gas segments.
Cause for concern?
MasTec's weakest segment was its electrical transmission unit,
which saw revenue fall 3%; but management is more worried about
its communications segment, which posted 6% revenue
growth. Specific weakness came from the wireless business,
where 12% revenue growth was far below expectations and recent
historical levels (61.25% compound annual growth over the last
Source: MasTec August Corporate Presentation, page 13.
According to MasTec CEO Jose Mas, the problem with the
wireless segment has been project deferrals from 2014 to
2015. However, management does foresee "a return to a more
normalized level of wireless project revenue in 2015."
Another area of concern was continued weakness in pricing for
oil and gas infrastructure, which has traditionally been one of
MasTec's strongest performers.
Source: MasTec August Corporate Presentation, page 11.
During the quarter, adjusted EBITDA (earnings before interest,
taxes, depreciation, and amortization) margin compressed to 9.8%,
far from management's goal of 12%. However, the company expects
margins to strengthen during the second half of the year as
demand for oil and gas infrastructure improves.
Management remains bullish on long-term outlook
During the second-quarter conference call, Mas said that despite
short-term weakness in certain key markets, "We are very
encouraged by the long term outlook in all our businesses and ...
we see unprecedented bidding opportunity in multiple
Management offered several examples of its efforts to mitigate
the short-term weakness in communications, including this
quarter's acquisition of Speed Wire, a broadband and security
installation company. Management believes this acquisition will
grow its security revenue to $100 million by 2015. MasTec
also received a $250 million 1-gigabit fiber contract that will
contribute significant revenue growth in 2015 and 2016.
On the oil and gas front, management remains bullish due to
this quarter's acquisition of Pacer Construction Holdings, which
MasTec believes can greatly increase its presence in Canada's
booming oil sands industry.
Canadian oil sands represent one of MasTec's largest growth
opportunities. In the last decade, $125 billion in capital
expenditure investment has poured into the region as oil sands
production has soared from 980,000 barrels per day in 2005 to 2
million barrels per day in 2013. That production is expected to
double by 2020, and the Conference Board of Canada anticipates
$386 billion in additional natural gas investments by 2035.
What to watch for in the future
MasTec has outlined several short-term and long-term goals.
In the next year or two, investors should keep an eye out for
continued weakness in operating margin in the oil and gas
segment, as well as a recovery in the growth rates of MasTec's
In the medium to long-term, the company has outlined four key
areas investors should monitor.
First is continued strong growth in U.S. energy
infrastructure, which analyst firm IHS believes is set to
experience $890 billion in new investment through 2026.If oil and
gas margins improve, the growth rate of this segment could
Second is international expansion, both into Canada, where
MasTec expects to generate $700 million this year,and Mexico. The
company today has a small presence in the Mexican wireless
infrastructure, but it aims to cash in on the expected $10
billion in natural gas pipeline infrastructure that is expected
to occur between 2013 and 2018 to support growth of Mexican
imports of U.S. natural gas.
Another growth avenue management is targeting is further
bolt-on acquisitions. With its recent Pacer acquisition, MasTec
expanded its borrowing facility from $750 million to $1 billion
and added the capability to borrow in Canadian dollars and
MasTec has acquired $1.2 billion worth of companies since
2007; this has allowed expansion into new markets, which
(alongside strong post-acquisition organic growth) has been a
major reason for the company's growth success.
Source: MasTec August Corporate Presentation, page 5.
One final area to watch is the company's project backlog.
After this quarter's results the backlog is down 5% compared to
the second quarter of 2013. While this isn't currently a trend,
it's something investors should watch going forward.
Source: MasTec August Corporate Presentation, page 8.
MasTec has reported two bad quarters, but management is confident
the company's long-term growth potential remains intact due to
its exposure to megatrends in the energy and telecommunication
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MasTec Q2 Earnings Stumble, but Growth Potential
originally appeared on Fool.com.
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