Description

Long Quanta Services: PWR is a Picks & shovels play on infrastructure expansion and modernization, which is set to benefit from a slew of tailwinds including the Data center/AI buildout, Near-shoring/reshoring, Grid modernization, Renewables/Energy Transition, EV Charging, 5G Transition, and LNG Export. 

Company Overview – Quanta Services is a specialty contractor delivering infrastructure solutions for the electric and gas utility, communications, pipelines, and energy industries. PWR reports results under 3 segments: (1) Electric Power Infrastructure Solutions, (2) Underground Utility and Infrastructure Solutions, and (3) Renewable Energy Infrastructure Solutions.

Quanta’s largest segment is Electric Power, where it has a leading market share position in North American Transmission & Distribution (at ~15% share). T&D is ~50% of PWR's total revenue (spread between the Electric Power and Renewable Energy segments) and is less cyclical than most industrial and other end markets.  The company aims to take advantage of secular growth trends related to electrification, grid modernization and renewable energy. 

PWR derives ~85% of overall Revenue from US customers, ~10% from Canada and the remainder mostly in Australia.  ~75% of 2023 revenues came from utilities + renewable energy developers[1], and multi-year contracts are ~40% of total revenues.  

PWR has made numerous acquisitions in recent years, with the most notable being Blattner in 2021 (which added renewable infrastructure solutions), Northwest Lineman College (2018) and PA Transformer Technology in 2023 for $300m (domestic manufacturer of power transformers). In 2023, PWR spent $780m on acquisitions (acquiring 5 businesses generating ~$500m in Revenues). PWR has 52k employees including 10k salaried employees and 42k hourlies. ~10% of this is non-US (mostly Canada) and ~1/3^rd of workforce is subject to collective bargaining agreements. Has fleet of ~70k support vehicles ranging from bucket-trucks to bulldozers and cranes.

Segment Breakdown:

The Electric Power Infrastructure Solutions segment (~45% of 2023 sales and ~55% of OP) provides services for electric power and communications infrastructure. Services range from initial design & construction to repair and maintenance of T&D systems, substations, and communication networks (incl Fiber and 5G deployments). 

The Underground Utility and Infrastructure Solutions segment (~25% of Rev and ~20% of OP) provides comprehensive infrastructure solutions to customers involved in the development, transportation, storage, and processing of Nat gas, oil, and other products. Customers here are primarily Nat Gas utilities and midstream companies. Note, this segment is largely seen as the least favorable given lower growth and the reliance on fossil fuels. Mgmt has said that they still expect growth here, but large pipeline projects in Canada will add to near-term fluctuations in growth/profits. However, electric demand growth related to AI/datacenters offers further potential upside here given expected energy shortages in several key datacenter regions and likelihood that natural gas will bridge the gap (discused more below). 

The Renewable Energy Infrastructure Solutions segment (~30% Rev and ~25% of OP) offers infrastructure solutions for utility scale wind, solar, hydropower, and battery storage facilities, encompassing engineering, construction, and maintenance services. The 2021 acquisition of Blattner enhanced capabilities here, as Blattner has installed ~25% of all utility scale renewable generation capacity in the US.  Other renewables including Hydrogen and Carbon Capture Sequestration (CCS) offer additional growth opportunities for this segment.

Valuation:

• PWR trades at ~31x ’24 EPS vs peer avg of ~24x 
• On EV/EBITDA, PWR trades at 19.5x 2024 EBITDA vs peer avg of ~13.5x 
• Premium justified by superior ROIC, earnings resiliency and Scale vs peers 
  • Earnings have been more stable, posting steady upward trend through both COVID and the postCovid inflationary environment.
    • ROIC up >500bps since 2015 (to ~8.5% vs peer avg of sub 6.5%), and EBITDA margins up ~40% (from ~6.5% to ~9.5%, progressing toward Mgmt’s LT goal of 10-11%).
  • PWR benefits from scale, as it is much larger than peers (~$40b EV is 2x nearest peer and ~8x FLR and DY), and has a broader service portfolio
  • PWR’s 3yr fwd Rev CAGR seen 9.5% (vs ~7% for peers), with growth driven by highly predictable, largely non-discretionary spend across multiple end-markets
    • Minimal exposure to out of favor sectors like Office, Retail and Multi-fam

Key Highlights

• Q1’24 saw solid results as growth passed midpt of guidance (Rev +14% YoY) and ’24 Rev outlook saw high end of range boosted (Mgmt sees Rev up ~9% at midpt, albeit this was partly from recent acquisitions in Q1 and April).
  • Backlog in Q1’24 was Flat QoQ at $30b (up ~20% YoY, and roughly double YE’20 lvls)
  • Mgmt targets LT organic revenue CAGR of 5-8%, with EPS growth > Revenue growth and double ROIC and EBITDA margins
    • By segment Electric Power Infrastructure (primarily T&D) LT growth CAGR of 5-9%, Renewable Energy Infrastructure +8-10%, and Underground Utility & Infrastructure +3-5%

• Base Biz focuses on sustainable recurring Revenues from smaller contracts and multi-year service agreements (MSAs), rather than larger contracts and 1x projects[2]
  • 85% of Rev from repeatable and sustainable activity
    • MSA projects tend to be smaller, more frequent, less lumpy, and also have less execution risk which ultimately lowers earnings volatility and risk from quarter to quarter.
    • Meanwhile PWR typically self-perform +80% of their work, eliminating intermediaries, which helps eliminate delays, and improves margins
  • Fixed price is ~50% of Rev, but most of the fixed price contracts have a small avg contract value (sub $5m)
    • The remaining ~50% of Rev is split between cost plus ~20% and unit price ~30%
      

• PWR’s customer base is well diversified and full of quality credits (Utility + Telcos + IG rated Midstream Cos).
  • Top 10 customers accounted for ~31% of 2023 revenues  (w/largest customer at 6%) and the top 20 customers were ~43% of revenue
    • Of this, the top 20 Utility customers were ~1/3rd of total revenues and Utility customers overall representing ~60% of total revenue
  • PWR has grown revenues from top 20 customers by ~21% CAGR since 2019, and top 20 utility customer revenue by ~11% CAGR over same period.

• PWR will continue to benefit from diverse set of long-term secular growth markets, and favorable Govt Policy (both Fiscal & regulatory) 
  • Whole Sector to benefit from Fiscal spending tailwinds from legislation already in place including the IRA, IIJA (aka infrastructure bill) and CHIPS Act
  • Data Center growth and AI power demand helps all 3 segments. Recent Mgmt commentary here was very bullish and aligns with what we heard from other sectors such as utilities.
    • Datacenter growth adds incremental demand for both electric and fiber. Electric demand requires both more generation, and more transmission. Also likely results in more demand for Natgas according to Mgmt, which helps PWR's Underground segment (meanwhile this segment was expected to shrink on a relative vs the other 2 segments, due to reliance on fossil fuels)
    • On the Q1 call, Mgmt said datacenter demand was ‘nothing like (they had seen previously)’, ‘caught them off guard’ and ‘mind-blowing’.
      • Mgmt cited incremental demand from utility customers and also said it is having conversations with hyperscalers directly on how to meet needs/collaborate. 
      • This aligns with recent comments from utilities. For example, SO’s Georgia Power increased DC demand projections by 16x, while Dominion Energy expects DC power usage in NOVA to 4x over next 15yrs.
  • More Renewables = more transmission needs, which also comes with more (reccuring) maintenance revenue further down the road
    • Underground Utility and Infrastructure segment's exposure to NatGas is somewhat of a hedge if Renewables ultimately undershoot growth expectations (or the green-transition ends up taking longer than expected)
  • Beneficiary of Outsourcing & Aging workforce
    • Majority of distribution/maintenance work is still performed in-house by utilities today, however according to PWR’s Mgmt, many of these employees skew older and are set to retire over coming years. As a result outsourcing by utilities will be increasingly common
      • This rational led to their 2018 acquisition of North Lineman College. PWR trains ~10-15k students/yr via this and other apprenticeships. As mentioned above, PWR self performs >80% of their work, thus they are essentially the labor provider for the utility industry.
  •  Government’s regulatory stance also improving, as policy is shifting back to being more favorable/friendly for permitting/approving new projects
    • Both the FERC and the DOE recently approved rule changes to improve planning and speed approvals for constructing transmission projects.
  • Besides Headline bills mentioned above, other Fiscal Spending also a tailwind
    • Federal spending on Broadband Equity Access and Deployment Program (BEAD) expected to accelerate near term
  • Benefits from extreme weather (emergency/storm restoration work)

• IG Rated B/S + Growing FCF = Upcoming Capital Return Potential 
  • Net Debt/EBITDA of 1.9x with liquidity of $2.6b including $500m of cash is sufficient to handle near term maturities[3]
    • Bulk of remaining debt maturities in 2030 and beyond
  • If PWR devoted next 12m FCF to repaying debt, Net leverage would be closer ~1x
    • Also PWR’s cashflow is typically counter cyclical (ie counter to rev growth mostly due to working capital demands)

Catalyst

• Capital Returns 
• Backlog growth and New Projects announced by Utilities/datacenters
• Inflation continues to decline (eliminates concerns around margins, wages and fixed price contracts and likely helps Renewables industry, where higher rates can weigh on new projects)
• Election (albeit seems both parties will spend on infrastructure)