|Shares Out. (in M):||82||P/E||14x||9.6x|
|Market Cap (in $M):||1,760||P/FCF||15x||14x|
|Net Debt (in $M):||1,008||EBIT||276||367|
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MTZ offers 60%+ upside over the next 12-18 months in asset-light E&C and Services company as multiple secular tailwinds take hold. Tightening capacity in NA long-haul pipeline construction, the reacceleration of AT&T capex and DTV adoption, and growth in gigabit fiber installations will drive revenue and margin upside for the next 3+ years. Free upside optionality in Mexican (and Cuban) infrastructure build-out catalysts and margin recovery in Transmission segment offer incremental earnings levers on top of robust fundamental trends in the base businesses. Legacy operational and reporting issues (multiple guide-downs in 2014 and a delayed 10-K filing in 2015) are still weighing on sentiment, despite a 75% move off the February lows. $34 base case PT (53% upside) with bull-case to $43 (100% upside) on our above-street 2017 EBITDA at mid-cycle multiples (6-7x EBITDA).
BUSINESS DESCRIPTION AND HISTORY
1. Oil & Gas backlog is largest in firm’s history (having just doubled sequentially into year-end 2015), and management guidance suggests this project backlog will be completed AND replaced within the next 6 to 9 months.
2. Oil & Gas EBITDA margins show potential for 200-300bps lift from 2015 as projects ramp and utilization improves across the industry.
3. Multiple tailwinds driving Communications business: 1) capex cycle improving for both wireless and wireline network infrastructure and 2) AT&T pushing faster DirecTV sub growth. Both offer additional organic growth opportunities to drive further margin expansion.
4. Free upside options in a multi-year infrastructure build-out in Mexico (O&G and Communications) and margin recovery in money-losing Transmission segment.
Electrical Transmission (ET) Segment
5. Company is run by multi-generational owner / operators with material equity holdings; large open-market insider buys within the last year suggest even more confidence in the business trajectory in 2016+.
SUMMARY OF VARIANT VIEWS
VALUATION AND TARGET PRICE
BASE = $34 stock (59% upside) $565m in FY17 EBITDA at a 6.3x multiple. Key assumptions: Communications revenue and EBITDA of $2.25B / $286m (12.7% margin). Oil and gas revenue and EBITDA of $2.28B / $302m (13.2% margin). Net debt of $725m (1.3x levered), FCF of $188m (FCF generation will remain depressed for the near future as MTZ requires heavy working capital investment to prepare for oil/gas ramp)
BULL = $43 stock (96% upside) $615m in FY17 EBITDA at a 7.0x multiple. Key assumptions: Communications revenue and EBITDA of $2.35B / $307m (13.1% margin). Oil and gas revenue and EBITDA of $2.31B / $314m (13.6% margin).
BEAR = $19 stock (14% downside) $425m in FY17 EBITDA at a 5.5x multiple. Key assumptions: Communications revenue and EBITDA of $2.13B / $251m (11.8% margin). Oil and gas revenue and EBITDA of $1.85B / $214m (11.5% margin).
2H16 operational beats, backlog growth and guidance raises into 2017
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