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Electric Power Operations Aids Quanta (PWR) Amid Challenges

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Quanta Services Inc. (PWR - Free Report) has been benefiting from focus on the base business, long-term programmatic spend of utilities, and the development of infrastructure that supports technology deployments such as 5G as well as electric vehicles.

However, soft industrial operations, a reduction in contributions from larger pipeline projects, regulatory challenges and risks like project delays, stiff competition as well as oil & gas volatility remain concerns for this specialty contracting services provider.

Over a year, shares of this Zacks Rank #3 (Hold) company have gained 159.7%, outperforming the Zacks Engineering - R and D Services industry’s 87.1% rally. Also, it has outperformed its peers like KBR, Inc. (KBR - Free Report) , Jacobs Engineering Group Inc. (J - Free Report) and Fluor Corporation’s (FLR - Free Report) 76.5%, 68.5% and 62% rally, respectively, 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 six of the trailing seven quarters.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Strong Q1 Performance

For first-quarter 2021, Quanta reported adjusted earnings of 83 cents per share that comfortably topped the consensus estimate by 12.2% and increased 76.6% from a year ago owing to improved margins. Margins were backed by increased profit contributions from emergency restoration efforts, the LUMA joint venture, and solid execution across much of its base business activity including gas distribution as well as industrial services.

However, total revenues of $2,703.6 million missed the consensus mark of $2,758 million by 2% and decreased 2.2% year over year due to lower contribution from the Underground Utility and Infrastructure Solutions segment.

At quarter-end, the company reported 12-month backlog of $8,932.1 million and total backlog of $15,830.3 million. At December 2020-end, 12-month backlog came in at $8,266.6 million and total backlog was $15,132.4 million. At March 2020-end, the figures came in at $7,594.5 million and $14,732.4 million, respectively.

Upbeat View

Backed by strong Q1 performance and increasing visibility, Quanta now expects 2021 revenues between $12.05 billion and $12.35 billion versus earlier expectation of $11.95-$12.35 billion. In 2020, revenues totaled $11.2 billion.

For 2021, adjusted earnings are now expected between $4.12 and $4.57 versus $4.02-$4.52 per share projected earlier. In 2020, the metric came in at $3.82 per share. Adjusted EBITDA is now projected within $1.10-$1.20 billion versus prior projection of $1.09-$1.19 billion. The current projection indicates 10% year-over-year growth at the mid-point. The increased expectation for 2021 is supported by a reduced annual tax rate of 25.25-25.75%.

Bottom-line estimates for 2021 have moved 0.7% upward to $4.36 per share over the past 30 days, indicating 14.1% year-over-year growth. Focus on the base business, long-term programmatic spend of utilities and technology deployments position it well for the future.

Solid Prospects for Electric Power Operations

The company continues to properly execute Electric Power operations from a top-line perspective. Segment revenues for first-quarter 2021, which include revenues from base business activities including communications operations, grew 16.6% from year-ago level. The solid performance was backed by 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.

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 resiliency against extreme weather conditions and support long-term economic growth. As of Mar 31, 2021, the segment’s 12-month backlog was $6.4 billion and total backlog was $11.7 billion, up from $5.3 billion and $9.65 billion, respectively, in the corresponding year-ago period.

Key Concerns

Volatility in Underground Utility and Infrastructure Solutions, and consumer spending have been affecting the company’s projects, as well as orders. The segment’s first-quarter 2021 revenues were down 35.5% year over year, primarily due to reduced revenues from industrial operations and a reduction in contributions from larger pipeline projects. The segment continues to be negatively impacted by COVID-related headwinds.

Also, stringent regulatory and permit hurdles for projects, highly competitive industry and volatility in the oil and gas market are pressing concern.

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