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Bull of the Day: MasTec (MTZ)

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I last wrote about MasTec (MTZ - Free Report) as the Bull of the Day on February 6 as earnings estimates and price targets were rising before their quarterly report this week.

The $3.75 billion E&C services (engineering & construction) provider for telecom and energy companies delivered record fourth-quarter 2017 adjusted earnings per share of 47-cents, beating the Zacks Consensus Estimate of 37-cents by 27%.

Including one-time items, MasTec reported earnings of $1.95 per share compared with 66-cents per share reported in the prior-year quarter. Earnings in the fourth quarter included an after-tax benefit of $1.46 per share related to the impact of re-measurement of the company's U.S. deferred income tax balances because of the Tax Cuts and Jobs Act enacted in December 2017.
Sales and the Backlog Surprise

The 27% EPS beat was driven by stronger than anticipated revenues in every segment, including a 16% beat in Communications, 28% beat in Oil & Gas, and a 30% beat in Electric Transmission.

MasTec’s net sales climbed 19% year over year to $1.6 billion in the quarter, outpacing the Zacks Consensus Estimate of $1.3 billion. Earnings improved across all segments. The Oil and Gas segment’s revenues in the reported quarter surged 30% to $740 million over the fourth-quarter 2016 level.

Revenues at the Power Generation and Industrial segment improved 18% year over year to $96 million. The Communication segment’s revenues increased 11% year over year to $662 million. The Electrical Transmission segment’s revenues inched up 1% year over year to $101 million.

Equally impressive was the that the company's 18-month E&C backlog increased in every segment on year-over-year basis to total backlog of $7.087 billion, growing 30.8% year-over-year (yoy) and 41.3% quarter-over-quarter (qoq).

Stifel Nicolaus reiterated their Buy rating and $63 price target on MasTec shares. Even though the company report didn't meet some of their higher expectations, the analysts were impressed by metrics of the revenue beat across all segments and the backlog of business projects.
Communications backlog grew 28.5% yoy and 3.5% qoq, Oil & Gas backlog grew 13.6% yoy and 178.4% qoq, Electrical Transmission backlog grew 37.7% yoy and 32.1% qoq, and Power Generation & Industrial grew more than 5x yoy and 74.3% qoq.

Cost of sales in the quarter jumped 27% year over year to $1.42 billion. Gross profit slumped 18% to $181 million from $221 million recorded in the prior-year quarter. Gross margin contracted 520 basis points to 11.3% in the fourth quarter.

Encouraging, Conservative Guidance
The year 2017 marked the second consecutive year of record financial performance for MasTec. Backed by the record backlog, solid demand, the company expects to deliver another record year in 2018. MasTec is poised to gain from significant amounts of project awards across multiple segments.

Management believes strong cash flow, solid capital structure and ample liquidity will provide financial flexibility to support significant growth opportunities.
Buoyed by these factors, MasTec projects 2018 annual revenues to be at record levels of $6.75 billion, above the Zacks consensus of $6.6B. It expects record adjusted earnings per share of $3.45 which marks an 18% rise over the prior-year levels. Additionally, MasTec estimates adjusted EBITDA to increase 6% to $685 million.
Among the few negatives, Current Q1 guidance was softer than expected, but the full-year looks strong enough to more than make up for that as the backlog of business is so strong headed into the warmer construction seasons.

Based on the company's strong but conservative guidance, we should see more analysts raising estimates and push MTZ from a Zacks #2 Rank to a #1 Strong Buy by the middle of week as the revisions are verified.

Analyst Reaction Thus Far

As of Thursday morning, we heard from a handful of investment bank analysts, including Stifel Nicolaus who did not raise estimates at this time because of the softer Q1 guide and because they were already above consensus.
Canaccord Genuity raised their PT to $65 as their analyst "sees more upside" to the growth story, while William Blair downgraded shares from Outperform to Neutral as they see growth leveling off. Here were other analyst actions...

  • KeyBanc reiterated their Buy rating and $60 PT
  • B. Riley reiterated a Buy rating and bumped their PT from $70 to $71
  • Credit Suisse reiterated their Outperform rating and notched their PT from $69 to $70
  • Craig Hallum reiterated a Buy rating and boosted their PT from $64 to $69
  • DA Davidson reiterated their Buy rating and a $65 PT

Disclosure: I own MTZ shares for the Zacks TAZR Trader portfolio.

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