Quanta's Growth Spurt Comes to an End

Editor's note: This was originally published on RealMoney. It is being republished as a bonus for TheStreet.com readers.

Please note that David Sterman will speak at "The Money Show -- Washington, D.C." on Friday, Nov. 7 (about why small-caps perform well at the end of recessions) and on Saturday, Nov. 8 (about how to spot tomorrow's tech winners and losers today).

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With a backlog in excess of $5 billion, Quanta Services (PWR Quote) would seem to be somewhat insulated from any near-term economic slowdown, yet its shares, which have fallen more than 40% since the company's last earnings report, reflect concerns that the company's recent growth spurt is petering out.

Quanta, which supports utilities, telcos and alternative energy providers in their efforts to upgrade and expand networks, has certainly built an impressive track record. Sales grew 72% in the June quarter and a still-impressive 20% on an organic basis, but with the recent slump in energy prices, along with a sudden freeze in credit markets, investors may fret that the prospects for continued growth (and a sustained large backlog) might be under threat.

Those concerns are likely overstated. Quanta's organic growth may slow closer to the 10% mark in 2009, in contrast to current expectations for nearly 15%-plus growth, but the company should remain in growth mode, even if the economy contracts. That's because our nation's energy grid is in the midst of a long-term modernization that began with the 2005 Energy Act. And with a fairly clean balance sheet, the company should be able to manage its cash flow quite well as much of the company's expenses are variable.

Nevertheless, the health of key programs will be the dominant theme on Wednesday's [Nov. 5] conference call. To the extent that any major programs are delayed, the company's backlog figures could be pushed down.

Those projects include the following:

• a 210-mile, 500,000-volt electricity transmission project between Virginia and Pennsylvania known as trAILco;
• an extension of the recently completed $190 million contract with the Lower Colorado River Authority;
• An ongoing $750 million contract with Northeast Utilities (NU Quote) to extend the electricity transmission lines in Connecticut; and
• a portion of the expected $5 billion in expenditures that Texas plans to connect wind farms to the national grid, with California also expected to update plans for a similar $6.5 billion in grid expansion.

Quanta is also likely to devote a decent portion of the conference call to its role in helping telcos upgrade their fiber networks, as well as spending plans by alternative energy customers. Investors should discount this portion of the call, as Quanta still earns more than 75% of its revenue from traditional energy grid projects.

TheStreet.com TV: Mad About Options: Quanta Update (Video, Nov. 6)

The Mad About Options crew takes a look back at Jim Cramer's comments about Quanta Services and how their option trades performed versus the stock trades.

To watch the video, click the player below:

Related videos on TheStreet.com TV: Cramer Interviews Quanta Services CEO (Oct. 8) and Cramer: Quanta Is a Wind-Win (July 23).