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).
PWR Earnings Preview: Hoping for Strong Utility Spending (Nov. 4)
This infrastructure services provider awaits more clarity on ongoing upgrades to our national energy grid.
With a backlog in excess of $5 billion,
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) 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:
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Related videos on
: Cramer Interviews Quanta Services CEO (Oct. 8) and Cramer: Quanta Is a Wind-Win (July 23).
Investors will also want to assess any revisions in profit forecasts. Management has spoken of 9% to 12% operating-margin targets, and some analysts believe that the company can approach 14% over time, but those targets may need to come down if the rate of grid modernization slows, due largely to reduced overhead absorption.
Right now, analysts expect per share profits to rise a heady 40% in 2009. Management is likely to suggest a more conservative posture by analysts, at least until the impact of falling energy prices and a slowing economy can be assessed.
PWR's Growth Spurt Comes to an End (Nov. 5)
While third-quarter growth rates were impressive, fourth-quarter guidance forecasts a cooling in demand.
Quanta Services 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
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.
That being said, the forecast for a $100 million drop in fourth-quarter sales (relative to expectations and on a sequential basis) is sobering and could represent a new baseline for Quanta in the near-term. Current consensus forecasts call for 15% sales growth and 40% profit growth in 2009. Those targets are likely to fall steadily, as analysts adjust to a more conservative posture. Management still thinks that sales can grow at a double-digit clip in 2009, but far more modest growth rates appear likely, unless the economy materially strengthens in coming quarters.
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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.