PWR - Quanta Services: Continues Upward Run Upside May Be Limited

2023-03-08 05:51:30 ET

Summary

• Quanta Services is starting to look pricey even after a recent beat and strong guidance.
• I expect the share price to continue climbing, but the reward is getting less attractive at current levels.
• For those liking the long-term outlook of the company, it's probably best to wait for a significant pullback before taking a position.

Quanta Services ( PWR ) is coming off nice earnings beat , with revenue of $4.42 billion beating expectations by $138.05 million, and EPS of $1.68, beating by $0.07 per share.

Since January 24, 2022, the share price of PWR has soared from approximately $93.65 per share to just under $168.00 per share on March 7, 2022, as I write.

The last time I wrote about the company , my thesis was the company will struggle to maintain the performance concerning the upward movement of its share price, and I still maintain that. It's up over 6 percent since then, but I still believe it needs to take a breather.

The bulk of the fairly recent performance of the company has come from the U.S. government spend on modernizing the grid, and to a lesser extent, repairs associated with weather knocking out the power grids in markets like Puerto Rico. The latter if of course unpredictable and subject to weather patterns in any one quarter of year.

Nonetheless, with a growing backlog and ongoing efforts to improve the U.S. grid, PWR is positioned strongly for ongoing revenue growth in its business, growth that should include solid earnings and an increase in free cash flow.

While the visibility is there to have confidence in the predictable growth of the company, I do have a concern that a lot of that is already priced in, and the stock is due for a pullback.

In this article we'll look at some of its recent numbers, the outlook for 2023, and why it's getting riskier in my opinion, to take a position at the price levels the stock is currently trading at.

Some of the numbers

Total revenue in the fourth quarter of 2022 came in at a record $4.4 billion, compared to revenue of $3.92 million in the fourth quarter of 2021. Full revenue for 2022 was $17.07 billion, compared to revenue of $12.98 billion in full year 2021.

Electric Power Infrastructure Solutions accounted for $2.32 billion of revenue in the reporting period; Renewable Energy Infrastructure Solutions accounted for $1.00 billion in revenue; and Underground Utility and Infrastructure Solutions accounted for $1.1 billion in revenue in the fourth quarter of 2022.

Gross profit in the fourth quarter was $667.6 million, compared to gross profit of $598.00 million in the fourth quarter of 2021. Gross profit for full year 2022 was $2.5 billion, compared to gross profit of $1.95 billion for full year 2021.

Net income of $163.00 million, or $1.10 per diluted share, compared to net income of $104.8 million, or $0.71 per share year-over-year. Net income for full year 2022 was $491.2 million, or $3.32 per diluted share, compared to net income of $486.0 million, or $3.34 per diluted share for full year 2021.

At the end of calendar 2022 the company had $8.80 billion in performance obligations remaining and a total backlog of $24.09 billion.

Free cash flow in the reporting period was $513.00 million, bring free cash flow for full year 2022 to $767.00 million. While impressive, it needs to be taken into account there was a one-off $101.00 insurance benefit during the fourth quarter that helped produce the quarterly and annual result for free cash flow.

As of the end of 2022 the company had cash and cash equivalents of $428.5 million, compared to cash and cash equivalents of $229.00 million at the end of calendar 2021. PWR had total liquidity of $2.4 billion and a debt-to-equity ratio of 2.1 at the end of the fourth quarter.

The company held long-term debt of $3.7 billion at the end of calendar 2022, compared to long-term debt of $3.72 billion at the end of calendar 2021.

Outlook for 2023

Management guided for revenue to come in at $18.40 billion to $18.90 billion for full year 2023. But when considering full year revenue for 2022 was $17.07 billion, it's a far lower pace of growth than from 2021 to 2022, and that's with management hyping up a strong 2023 on the revenue side of things. Revenue from 2021 to 2022 was up over $400.00 million, while revenue from 2022 to 2023 is projected to be approximately $133.00 million more than the prior year.

Net income for the year is projected to be in a range of $692.00 million to $766.00 million, with diluted earnings per share expected to be in a range of $4.67 per share to $5.17 per share.

Net cash from operations is guided to be in a range of $1.15 billion and $1.40 billion, and free cash flow in a range of $750.00 million to 1.00 billion.

Breaking it down by segment, its Electric Power segment is guided to generate revenue of $10.00 billion to $10.1 billion for full year 2023. Approximately $250.00 million of that is expected to come from emergency restoration services, compared to over $300.00 million for all of 2022.

On a quarterly basis, the Electric Power unit is expected to a weaker Q1 2023, with growth projected to be in the mid-single-digits as measured against the fourth quarter of 2022. Operating margin in the segment for the first quarter should be around 9 percent, according to management.

Concerning its Renewable Energy segment, full year 2023 revenues are guided to be in a range of $4.3 billion to $4.5 billion. The company believes headwinds the segment faced in the solar market in 2022 should significantly improve in the second half of 2023.

Management stated it was confident in its 2023 guidance of Renewable Energy because it already had close to $3.00 billion in planned revenues in "various stages of construction" already.

Revenue in the first quarter of 2023 is expected to be modest at $850 million to $900 million.

Margin in the segment is guided to be down from 9 percent in 2022 to 8.5 percent in 2023.

In its Underground Utility and Infrastructure Solutions segment, full year 2023 revenue is guided to be in a range of $4.1 billion to $4.3 billion, a little down from 2022. Much of the decline is related to larger pipeline project revenue dropping from $900.00 million in 2022 to $450.00 million in 2023.

Operating margin for full year 2023 is projected to be in a range of 7.25 percent to 7.75 percent, although operating margin in the first quarter of 2023 will probably be closer to 5 percent, according to management.

Following that, the company sees the second and third quarters of 2023 improving, with the fourth quarter slowing down on a usual seasonal basis.

Conclusion

Taking into account a slower pace of growth from 2022 to 2023 than there was from 2021 and 2022, combined with a weaker first quarter of 2023, I see this as probably being the most likely time the stock will take a hit, providing a more favorable entry point for investors.

Even though the company has a record backlog of $24.1 billion, from management commentary and guidance, it appears it's going to be stretched out over a period of time and won't have the type of impact it had in 2022.

So, while I'm looking at a correction once the numbers come out from the next earnings report, I do think the company has a decent runway ahead that should at least provide incremental growth now that a lot of the visibility is already price in, in my opinion.

The best play I see is for investors to wait for a meaningful correction, and at that time take a position. Either that, or dollar-cost average knowing you're going to get a decent cost basis in preparation for what seems to be a fairly long period of growth for the company.

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