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Quanta Services Rides on Acquisitions, Margin Woes Persist

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Quanta Services, Inc.’s (PWR - Free Report) three-pronged growth strategy as well as strength in Electric Power and Oil & Gas segments bode well for its future earnings prospects. Also, the company’s focus on acquisitions serves as a fundamental component to boost its backlog. However, oil and gas volatility, regulatory challenges and stiff competition raise concerns.

Shares of Quanta Services have outperformed its industry in the past three months. Its shares have gained 0.7% against the industry’s decline of 14.4% in the said period. Earnings estimates for 2018 have remained stable while that of 2019 have moved north over the past 30 days.

Let’s delve deeper into the factors that substantiate its Zacks Rank #3 (Hold).

Key Growth Drivers

Quanta Services is highly focused on its three-pronged growth strategy. The initiative includes timely delivery of projects to exceed customer expectation, leveraging on core business to expand in complementary adjacent service lines and continuously exploring new service lines.

Quanta Services sees acquisitions as a fundamental component of its strategy to boost market share and develop incremental backlog. In fact, in the first nine months of 2018, it recorded a 12-month record backlog of $7.5 billion compared with $6.4 billion at the end of 2017. Moreover, acquisitions added $32.2 million to the company’s revenues in the first nine months of 2018.

Quanta Services is experiencing strong end-market results and diverse scale of operations. Hence, it raised its full-year 2018 earnings and revenue guidance.

Moreover, both its Electric Power and Oil & Gas segments remained strong during the first nine months of 2018. Revenues from the Electric Power segment increased 18.2% year over year and that of Oil and Gas segment grew 28.5% in the said period. This increase was primarily driven by higher customer spending within electric transmission projects and distribution services, along with incremental activity from Stronghold.

Prospects of both the segments remain robust, given larger transmission projects, high-end EPC contracts, along with improving mainline and natural gas distribution, and integrity markets. Notably, the communications infrastructure services business is performing brilliantly and is continuously achieving double-digit operating margins.

During the third quarter of 2018, the company received its largest turnaround project that is expected to start in December 2018 and end in late 2019. Consequently, the company expects 2019 to be a record year for its industrial services group. In a nutshell, the company is poised to gain from end-market prospects of both its segments.

Causes of Concern

Quanta Services has been experiencing delays, which are likely to result in liquidated damages, on a processing facility project. Also, its Oil and Gas segment is highly volatile in nature. Unfavorable timing of revenues and corresponding income contributions of certain projects have been adding to the company’s woes.

During the first nine months of 2018, the segment’s operating income declined 9.2% from the year-ago quarter. Also, its operating margins declined 110 basis points due to reduced capital spending by customers on large diameter pipeline projects as well as certain charges associated with the same.

Additionally, as a large chunk of Quanta Services’ business involves outdoor activities, it is vulnerable to unfavorable weather conditions.

Stocks to Consider

Some better-ranked stocks in the Zacks Construction sector include KBR, Inc. (KBR - Free Report) , Altair Engineering Inc. (ALTR - Free Report) and EMCOR Group, Inc. (EME - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

KBR surpassed earnings estimates in three of the past four quarters, delivering average positive surprise of 12.6%.

Altair’s earnings are expected to grow 23.1% in 2018.

EMCOR’s earnings for the current year are expected to increase 20%.

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