Shares of Quanta Services, Inc. (PWR - Free Report) have surged about 13.3% in the past year compared with the industry’s rally of 1.2%. The price performance is backed by impressive earnings history. The company has an average positive surprise of 6.7%, beating estimates thrice in the trailing four quarters.
Quanta Services is enjoying strong prospects in its electric power segment, courtesy of maintenance and replacement of aging infrastructure, generation mix shifting to more renewable and natural gas, grid modernization as well as regulations to improve grid reliability. Also, the company’s oil and gas segment outlook bodes well, owing to improving mainline and natural gas distribution along with integrity markets.
Also, earnings estimates have moved up in the past few weeks, which indicate that sentiments on the company are treading in the right direction. Over the past 60 days, the Zacks Consensus Estimate for current-year earnings rose 5.3% to $2.79.
Also, earnings estimates for the next year have improved 5.2%. This positive trend reflects analysts’ bullish sentiments. Also, the company’s Zacks Rank #1 (Strong Buy) indicates robust fundamentals and expectations of outperformance in the near term.
Let’s delve into the factors that will continue to propel Quanta Services upward in the near future.
Electric Power and Oil & Gas Segments Bode Well
Quanta Services is experiencing solid prospects in its electric power segment. Particularly, the company’s communications infrastructure services business is performing brilliantly. For instance, the company booked about $400 million of backlog with eight customers in the United States in 2017. The company is optimistic about communications infrastructure services operations, courtesy of expansion of larger diameter pipeline market and a multi-year cycle ahead.
The Fort McMurray West 500 kilovolt transmission project, which is the single largest one secured by the company, continues to be a major profit churner and is currently undergoing construction. The North America electric transmission and distribution markets are expected 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.
In a nutshell, growth of the electric power segment is expected to be fuelled by the need to maintain and replace aging infrastructure, generation mix shifting to more renewable and natural gas, grid modernization and regulation aimed at improving grid reliability.
Quanta Services’ Oil and Gas segment outlook looks promising, primarily owing to the improving mainline and natural gas distribution and integrity markets. The release of customer budgets, favorable weather and commencement of scheduled projects will boost results in the coming quarters.
Going forward, the company continues to expect healthy levels of base load work including supporting midstream infrastructure, downstream support services and natural gas distribution. The company expects strong performance from pipeline projects, driven by a considerable increase in large pipeline revenue contributions amid an active bidding and negotiating environment.
Solid contributions from these two segments are expected to boost revenues and earnings. Notably, the Zacks Consensus Estimate for revenues is pegged at 10.6% and earnings are projected at 41.6% for 2018.
Encouraging Strategic Buyouts
Quanta Services considers acquisition as a fundamental component of its strategy to boost market share. In January 2018, the company completed the acquisition of Northwest Lineman College, a dominant educational and training organization. The buyout has enabled the company to offer training services across the entire lifespan of a line worker's career.
In 2017, it closed the acquisition of specialized services company, Stronghold, which provides high pressure and critical path solutions to the downstream and midstream energy markets. Quanta Services was able to capture a greater portion of the industry operations and capital, on the back of this deal.
Also, the company closed First Infrastructure Capital (“FIC”), a partnership between the company and select infrastructure investors, which is likely to provide opportunities for investments. FIC can offer approximately $750 million of capital for investment in infrastructure projects in markets served by Quanta Services. This partnership is a major milestone of the company’s broader strategy of partnering with customers and providing fully integrated, differentiated infrastructure solutions.
Valuation Looks Rational
Quanta Services has a Value Style Score of B, putting it in the top 40% of all the stocks we cover from this perspective. This combined with a good earnings growth prospects makes us reasonably confident that though the company is currently trading at a discount, it has ample opportunities in the near future.
The company currently has a forward P/E ratio (price compared with this year’s earnings) of 12.7 compared with the industry’s 17.5. This indicates a more value-oriented path for Quanta Services compared with its peers.
Industry Outlook Positive
Though the Zacks Engineering - R and D Services Industry underperformed the S&P 500 index’s rally so far this year, it carries a solid Zacks Rank. An impressive industry rank (among the top 18% out of 265 industries) indicates that the companies in this space are likely to benefit from favorable broader factors in the immediate future.
Other Stocks to Consider
A few other top-ranked stocks in the same sector are Installed Building Products, Inc. (IBP - Free Report) , PGT, Inc. (PGTI - Free Report) and Patrick Industries, Inc. (PATK - Free Report) . All the stocks sport a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Installed Building Products, PGT and Patrick Industries have a long-term earnings growth rate of 30%, 19.3% and 12.7%, respectively.
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