is poised to power higher.
The Houston specialty contractor has a mundane mission: to string more wires, cable and pipe for its utility customers. And, through its network of more than 50 subsidiaries, it is doing just that: upgrading the electric transmission grid, stringing fiber cable and laying pipelines for some of the largest names in the business.
High in Fiber
Quanta has felt the telecom pain over the past two years -- its shares have lost nearly 75% since summer 2000 -- but the company is much more than a fiber and copper company.
The contractor's largest and fastest-growing business is the electric-utility sector, which accounted for 41% of total sales in the first nine months of 2001. Telecom accounts for 28% of revenue, cable 14% and internal building wiring about 6%.
Quanta's CEO says that diversity helped the company weather the storm. "Our diverse service offerings and dominant market position in the electric power and gas markets enabled us to generate significant earnings in this challenging economic environment," said John Colson, in a statement announcing third-quarter earnings.
Still, the telecom slump hasn't helped. The company lowered 2001 guidance three times as a result of weak telephony business, most recently in November. With a handful of Quanta customers fighting for their own survival, many investors simply have given up.
But the worst is over, says one analyst. "It is our view that current telecom conditions are about as bad as they will get and that spending will stabilize in the first half of
2002," SunTrust Robinson Humphrey analyst Mark Hughes told clients. "
Our view is that the bad telecom news is now fully factored into the stock." He rates the stock buy, and his firm has provided banking services to the company.
Interestingly, a potential benefit to Quanta of the protracted telecom downturn is the increased outsourcing from the regional bell operating companies and other telephony companies. Companies such as
recently announced plans to increase outsourcing to reduce payroll costs.
Despite the telecom struggles, recent gains in the electric-utility business suggest a brighter future.
In the first nine months of 2001, Quanta's electric-utility contracting business -- stringing and servicing transmission and distribution lines -- grew by more than 20%. Moreover, Quanta says it can sustain 15% to 20% growth in the business through 2002 as it benefits from increased outsourcing and transmission grid upgrades.
The potential from the transmission market is large. A recent government report indicates an additional $12.6 billion is needed to upgrade the nation's crumbling electric transmission and distribution system. Many investors have focused on the power generation business, not realizing that transmission bottlenecks are a significant problem. In fact, many of California's spring blackouts could have been avoided if the state's transmission grid had been updated from its 1950s infrastructure.
To eliminate the bottlenecks, the Federal Energy Regulatory Commission is recommending that billions of dollars be spent to eliminate the 16 largest bottlenecks, which cost consumers more than $1 billion in higher electric bills during the past two years. FERC is shepherding the creation of Regional Transmission Organizations (RTOs) to oversee the grid enhancements.
Grid improvements should be a boon for Quanta, which Hughes says is "well-positioned to benefit from the outsourcing of major transmission upgrades and progress in creating RTOs, which could serve as a catalyst for increased spending on transmission projects."
With telecom pressuring Quanta shares in the past two years, valuation is compelling, especially if you believe the trough in telecom spending is near. Quanta is trading at less than 12 times 2002 reduced earnings estimates. That's an especially good value if you believe Quanta can grow long-term earnings by 15% to 18%.
There are risks: The company relies on 10 customers for 25% of its revenue, although the majority are stable electric utilities. And continued weakness in the economy -- especially in telephony -- could pressure Quanta shares further.
Plenty of investors are betting against Quanta, with more than 17% of the float short and nearly 12 days of average volume needed for the shorts to cover as of December. Any good news could squeeze the shares higher.
Yet, we think the bottom is in sight and will soon be in the rearview mirror. If you are looking for potential growth at a reasonable price, Quanta makes the grade, especially if for patient investors. We give this potential powerhouse three barrels.
(For an explanation of our barrel rating system, see our recent description.)
A Look Back
A quick look back at previous picks can be found below, with two names of note:
Buoyed by colder weather and apparently strong December sales, shares of
Hibbett Sporting Goods
have returned to the black. We like the long-term prospects for Hibbett's growth, although those with a weak stomach after the wild two-month ride might consider taking meager profits in Hibbett.
has been in the news lately as
Johnson & Johnson's
trial of a coronary artery stint with a SurModics coating continues to advance. We think continued good news on the trial and midsummer approval for use in Europe will boost the stock.
Do you have candidates for Bottom of the Barrel? If so, shoot me an email with the company's name, why you think it qualifies and your full name and hometown. If we profile your suggestion, we'll send you a
gift to commemorate your pick.
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to