PWR's Growth Spurt Comes to an End

For Sterman's preview heading into the Quanta Services conference call, please click here.

(Please note that TheStreet.com's David Sterman will speak at "The Money Show -- Washington, D.C.," which will be held from Nov. 6 through Nov. 8. David will speak on Friday, Nov. 7 about why small-caps perform well at the end of recessions, and he will speak again on Saturday, Nov. 8 about how to spot tomorrow's tech winners and losers today.)

Quanta Services (PWR - commentary - Cramer's Take) reported solid third-quarter results, aided by four different hurricane-related emergency services projects, but fourth-quarter guidance was quite tepid, sending shares down roughly 15%. Quarterly sales exceeded $1 billion for the first time, and EPS of 29 cents is also a record (if you back out a one-time tax gain, which boosted results in the year-ago quarter).

Although Quanta's impressive $5 billion backlog could have provided a margin of safety in the current economic slowdown, a number of the company's key customers have decided to defer certain prospects. As a result, Quanta is likely to generate $875 million to $930 million in sales in the current quarter, less than the roughly $1 billion in sales investors had been anticipating. Per-share profits are unlikely to exceed 20 cents in the current quarter, below the consensus 26-cents forecast.

That forecast signals the end of an impressive run. Quarterly revenue had been rising at a very fast clip (and nearly 20% on an organic basis in recent periods), yet it now appears that sales will fall roughly 10% sequentially, and investors need to assess if $900 million is now established as the baseline for coming quarters or if sales might fall still further.

Quanta doesn't need to worry about any particular project falling through, as the company's largest customer represents just 4% of sales and the top 10 customers count for a reasonable 30% of sales. Also, with the credit markets beginning to thaw, it is increasingly likely that customers will gain access to ongoing financing for key projects. Nevertheless, management acknowledges that customers such as AT&T (T - commentary - Cramer's Take) and Verizon (VZ - commentary - Cramer's Take) have slowed down their capital spending programs.

Management highlighted a very large number of big-ticket projects that could get a green light in coming years, especially in the area of alternative energy. Last night's win by President-elect Barack Obama increases the chances that we will see sharply increased spending on wind, solar and other green projects. The timing and size of any federal support will likely color the company's growth rates in 2010 and 2011.

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David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.