by Debra Fiakas CFA
Electric power companies need plenty of generating plants and distribution works to bring electricity to our doors. Electric utilities are very good at generating electricity and managing relationships with the families and businesses that use the power, but building all that infrastructure – drawing up plans, hauling in materials and fastening girders – is not necessarily a power company’s strong suit. Enter Quanta, Inc. (PWR: NYSE) with a full menu of design, engineering and construction services for electricity generation and distribution infrastructure.
Solving problems for electric utilities is good business for Quanta. The company does leave all its eggs in one basket. Quanta has developed expertise in building pipelines and production facilities for the oil and gas industry as well. The company earned $211.4 million in net income or $1.82 per share on $7.8 billion in total sales during the twelve months ending September 2015. Even more significantly the company generated $690.3 million in cash during the period.
It is not entirely a bed of roses for Quanta. Sales grew 22% in 2014, but the growth rate has sputtered in recent months leaving year-over-year comparisons flat in recent periods. While Quanta managed to report earnings that beat the consensus estimate by a penny in the quarter ending September 2015, the company missed expectations by a wide margin in the previous three quarters. The dozen or so analysts who follow Quanta closely have forecast a ‘down year’ in sales and have estimated only low single digit growth next year. Quanta’s heyday in the infrastructure market may have come and gone – at least for now.
Quanta may have the financial strength to withstand a difficult period. At the end of September 2015, the company had $350.6 million in total debt, representing a 10.9 debt-to-equity ratio. This compares to an average debt-to-equity ratio of 122.1 times for the general contracting industry. The balance sheet has been aided by the sale earlier this year of Quanta’s fiber optic licensing operation to Crown Castle International for $830 million after taxes.
Quanta now has $49.2 million in cash resources on the balance sheet that can help tied the company over in a tough time. Even under slow growth conditions Quanta is expected to remain profitable and generate operating cash flow.
The company had been a bit stingy with its cash, foregoing a dividend. However, leadership opened up the purse strings to buy back 14.4 million shares of common stock for a total of $406 million in the first nine months of 2015. Then in August 2015, the stock repurchase plan was extended by $1.25 billion that will be available through 2017.
PWR is trading at 11.4 times trailing earnings compared to an average of 16.1 times trailing earnings for Quanta peers in the construction industry. It appears PWR trading at a discount because of expectations for slowing growth in the next year. Investors in PWR get a good value with the promise of support from the company’s stock repurchases over the next year.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.