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Can Quanta Services Trump Headwinds on Pipeline Strength?

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On Sep 6, we issued an updated research report on Houston, Texas-based Quanta Services Inc. (PWR - Free Report) , which provides specialty contracting services to the electric power, and oil and gas industries globally. The company currently carries a Zacks Rank #3 (Hold).

Last month, Quanta Services had posted a huge earnings miss, as its second-quarter 2016 earnings lagged the Zacks Consensus Estimate by over 56%. Apart from broad-based weakness, profits were hurt by a host of factors like a major project loss, persistent softness in the oil and gas segment as well as unrelenting engineering and production issues in a power plant construction project in Alaska. Wildfires in Alberta, Canada and higher-than-expected tax liability extended losses for the company.

Following the dismal performance, the Zacks Consensus Estimate has moved south over the last 30 days, indicating bearish analyst sentiment. The Zacks Consensus Estimate has declined 13.8% to 50 cents for the upcoming quarter and 7.3% to $1.39 for full-year 2016.

The company’s electric transmission and mainline projects continue to be adversely affected by reduced customer spending and delays in project timing stemming from regulatory and permitting issues. In addition, it is incurring losses in its power plant project in Alaska, which has deeply affected its growth momentum.

Further, revenue growth in the company’s Oil and Gas segment has been hampered by regulatory delays on some large mainline pipe projects and fluctuations in timing of large projects. Currency fluctuations also continue to be a drag on the company’s financials. In the last reported quarter, unfavorable foreign currency translations reduced the company’s sales by about $8 million.

QUANTA SERVICES Price and Consensus

 

QUANTA SERVICES Price and Consensus | QUANTA SERVICES Quote

However, Quanta Services expects a strong rebound in its end markets in coming quarters, on the back of solid growth drivers like an aging grid, shifting generation mix and implementation of clean energy initiatives. According to the C3 Group, an independent energy infrastructure and utility research organization, expenditure on transmission is projected to be around $25–$30 billion in North America through 2020.

Thus, the North American electric transmission and distribution markets are anticipated to act as one of the key growth drivers for the company as the region continues to deploy more capital in transmission and distribution upgrades to improve system reliability and deliver renewable electricity from new generation sources to demand centers.

The company is optimistic about high-voltage electric transmission award opportunities amid substantial bidding activity and is pursuing a number of large high-voltage electric transmission projects both in Canada and the United States. Also, Quanta Services has a sturdy base of large transmission projects in its backlog. It recently won two large electric project awards, whose aggregate contract value is about $500 million.

Despite a tepid first half, the company expects strong performance from pipeline projects in the second half of 2016. It believes the considerable increase in large pipeline revenue contributions will boost its performance amid an active bidding and negotiating environment. It has a meaningful visibility and remains confident that multiple mainline projects, worth billions of dollars, will commence in 2017 and 2018.

Quanta Services’ solid acquisitions also continue to bolster its top-line growth. In the last reported quarter, its acquired companies contributed about $40 million to revenues, primarily in the Electric Power Infrastructure Services segment. We believe that Quanta Services is well positioned to bank on the encouraging prospects in its business for the upcoming quarters.

Stocks to Consider

Better-ranked stocks in the broader consumer discretionary sector include Electronic Arts Inc. (EA - Free Report) , Activision Blizzard, Inc. and Take-Two Interactive Software Inc. (TTWO - Free Report) , each carrying a Zacks Rank #2 (Buy).

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