Tuesday, November 03, 2015

MasTec's Day of Reckoning

This week, infrastructure builder MasTec (MTZ:  NYSE) is scheduled to report financial results for the quarter ending September 2015.  It is to be a ‘down’ quarter according the consensus of nine analysts who have published estimates on the company.  The consensus is for earnings of $0.33 per share on $1.14 billion in total sales, representing a year-over-year decrease in earnings and sales of 13% and 41%, respectively. 

To make matters worse MasTec has disappointed investors in each of the last two quarters, coming in with lower earnings than had been posted by analysts.  After the last letdown, analysts cut their estimates for the September quarter, lowering the hurdle by 18%.

The near-term weakness of MasTec flies in the face of predictions for a resumption in infrastructure spending.  MasTec takes on the tough jobs:  energy projects, electric utility lines and stations, power lines, underground communications cable networks, oil and gas pipelines, and industrial plants, among other major building projects.  MasTec provides design, engineering and construction management expertise to its projects.  Worldwide spending on heavy construction and infrastructure is expected to double over the thirteen years beginning 2012, reaching $9 trillion in 2025.  It is the growth rate more than the market value that is important in understanding MasTec’s fate.  This data is from a 2015 report by Oxford Economics.
Top of the World Wind Farm – 200MW
Top of the World Wind Farm, Glenrock WY

On the whole the business of building infrastructure and large industrial projects is a good business to be in with exceptional growth rates implied by Oxford’s prediction.  Government and industry are still making up for the lost years between 09 and 2012 as well as the slow economic recovery in the years since.  Unfortunately, the recovery is uneven.  Spending in the U.S. and Western Europe is progressing at a slow pace, held back by ultra cautious lending.  Austerity does not trouble thinking in emerging economies and so we see accelerating growth in China and other parts of Asia.  Widespread urbanization across Asia lends another driving force.

The spotty recovery could be one reason investors have been disappointed in MasTec.  Analysts are likely to be let down by applying global trends dominated by the growth dynamics of emerging markets to companies like MasTec, which are more dependent upon the sluggish U.S. domestic market.

That is not to say there are no opportunities for MasTec even in the slower growing U.S. market.  Shifting priorities in the use of natural resources and energy generation will produce interesting opportunities for many years to come.  With talent and experience in energy infrastructure of various types, MasTec is in a good position to win new projects.

MasTec reported total sales of $4.6 billion in the twelve months ending June 2015, providing net income of $66.3 million or $0.72 per share.  Sales had increased in each of the last three fiscal years, proving MasTech can grow even in a weak demand environment.  The company has delivered a profit in every year, but profit margins have been a bit erratic.  No matter.  Cash flow from operations has been on a steady climb, delivering positive free cash flow in each of the last three and a half fiscal years.  The cash comes in handy to help MasTech pay off its long-term debt, which totaled $1.2 billion at the end of June 2015.

The recent losses have spooked investors, leaving the stock trading at 11.3 times forward earnings.  That might be a good value if the consensus estimate holds up.  Investors will know soon enough as MasTec’s third quarter day of reckoning arrives this week.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

No comments: