Here's Why Investors Should Retain Quanta Services (PWR) Now
Quanta Services Inc. PWR has been benefiting from its focus on the base business, solid Electric Power business performance, acquisitions, and development of infrastructure that supports technology deployments such as 5G and electric vehicles. Shares of the company have gained 56.6% year to date, outperforming the industry’s 27.9% rally. Also, it has outperformed the S&P 500’s 18% rally and broader Zacks Construction sector’s 14.1% rise in the said period. The company’s price performance was mainly driven by a solid earnings surprise history, having surpassed the Zacks Consensus Estimate in seven of the trailing eight quarters.
Yet, challenges associated with Industrial operations have been affecting the company’s projects and orders.
That said, full-year 2021 earnings estimates for this Zacks Rank #3 (Hold) company have moved 1.3% upward over the past 30 days. This positive trend signifies bullish analysts’ sentiments, indicating robust fundamentals in the near term. It has solid prospects, as is evident from the Zacks Consensus Estimate for 2021 earnings of $4.61 per share, which indicates 20.7% year-over-year growth. Quanta Services is a great pick, supported by a VGM Score of A.
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Let’s delve deeper into the factors supporting Quanta Services. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Major Growth Drivers
Electric Power Operations
The Electric Power segment — accounting for 69.4% of 2020 revenues and including contribution from base business activities including communications operations — has been performing well. Segment revenues grew 18.2% for first-half 2021 from the comparable year-ago period, given impressive base business activities, courtesy of robust spending by electric utilities on grid modernization and infrastructure hardening, particularly in the western United States as well as by gas utilities on distribution system modernization and safety programs. Also, contributions from larger transmission projects underway in Canada and revenues from acquired businesses of approximately $70 million aided the company. Electric utilities have been expanding their renewable generation portfolios that would create opportunities for Quanta Services in the future. It is important to note that more than 70% of the company's 2020 revenues were directly tied to regulated electric and gas utility customers, core to its business.
Prospects also look bright, given a solid backlog level. As of Jun 30, 2021, the segment’s 12-month backlog was $6.5 billion and total backlog was $12.64 billion, up from $5.34 billion and $9.68 billion, respectively, a year ago. Prospects of the Electric Power segment remain robust, given customers’ investment in grid modernization programs to accommodate a changing fuel generation mix toward natural gas and renewables, intended to address the aging infrastructure, strengthen systems for resilience against extreme weather conditions as well as support long-term economic growth.
Quanta Services follows an inorganic strategy to boost market share and develop incremental backlog. In first-quarter 2021, it acquired a U.S.-based business that primarily provides horizontal directional drilling services for $3.5 million in cash. The company made seven acquisitions during 2020 that primarily serve electric and gas utilities along with communications companies. Quanta Services invested approximately $400 million in 2020 in strategic acquisition of seven high-quality companies with great management teams, which expanded or enhanced its ability to provide solutions to customers. These are additive to the base business and advance the company’s strategic initiatives.
Higher Return on Equity (ROE)
Quanta Services’ trailing 12-month ROE is indicative of growth potential. ROE in the trailing 12 months is 13.3%, much higher than the industry’s 6.8%, reflecting the company’s efficient usage of shareholders’ funds.
Headwinds in Industrial Operations
Its industrial operations and non-U.S. markets within the Underground Utility and Infrastructure Solutions segment continue to remain under pressure owing to COVID-19 dynamics, which impacted core revenues and margins during second-quarter 2021.
During the second-quarter 2021 earnings call, the company slightly moderated 2021 expectations for the Underground Utility and Infrastructure Solutions segment, primarily due to a lack of visibility into new project awards. It now expects revenues in the range of $3.5-$3.65 billion, and segment margins between 4.6% and 5.1%. Earlier, the company expected revenues between $3.65 billion and $3.85 billion, and the segment margins within 5.5-6%.
3 Construction Stocks to Bet on
Some better-ranked stocks in the broader space include ChampionX Corporation CHX, KBR, Inc. KBR, and Jacobs Engineering Group Inc. J, each carrying a Zacks Rank #2 (Buy).
ChampionX’s, KBR, and Jacobs’ earnings topped analysts’ expectations in the trailing four quarters, with an average of 405.3%, 24.9%, and 13.5%, respectively.
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