Introduction

MasTec (NYSE:MTZ) is a construction and engineering company that works on infrastructure projects across the U.S. Over the years, the company has been repositioning its portfolio to target higher growth end-markets, which has led to strong growth in recent years. In this article, I'll analyze the company's strategy, outlook, recent results and valuation.

Company Overview

MasTec is a North American construction and engineering firm that's involved in a wide range of infrastructure construction projects. These include cell tower design and installation, wind farm construction, pipeline installation, canal bank repair, water treatment plant improvements, sewer system implementation, and more.

MasTec has four reportable segments it classifies its revenues under. This includes Oil and Gas, Power Delivery, Clean Energy and Infrastructure, and Communications. Serving a vast range of industries, MasTec takes on projects of varying size and often helps its clients design, construct, and implement engineering products using optimal materials and construction methods in order to meet their needs and enhance their return on investment.

Background

Despite being in the relatively cyclical industry of construction and engineering, shares of MasTec have actually outperformed over the last decade. Compared to the S&P500's total return of 236% over the last ten years, shares of MasTec have returned 265%. Albeit with more volatility along the way compared to the rest of the market, shares have still delivered a strong 13.8% CAGR.

When looking at the historical financials of the company, MasTec has delivered decent results in both the top and bottom line. Over the last decade, the company has delivered a CAGR of 10.7% in revenue and a 5.8% in EBITDA. In the last five years, the company has delivered CAGRs in revenue and EBITDA of 11.7% and 2.0%, respectively. As the revenue CAGRs are larger than the EBITDA CAGRs, this illustrates that EBITDA hasn't grown as quickly as the company's top line, as evidenced by margin contraction in the chart below.

Recent Results

When looking at the latest results for MasTec, the company reported Q1 results that came in above analysts expectations. On the top line, revenue came in at $2.69 billion, which was up 4.0% on a year over year basis, beating consensus estimates by $65 million. EPS came in -$0.13, a negative print, however, this still beat analysts' estimates of -$0.48, a more negative expectation.

During the quarter, the company's top line growth was largely driven by the performance of the Oil and Gas segment. Compared to the rest of the segments, Oil and Gas was the only one that was up year over year, climbing 147%. This shows up in EBITDA contribution too, where Oil and Gas went from less than 10% last year to over half of EBITDA for Q1 this year.

In the Oil and Gas segment specifically, the segmented outperformed management's guidance, which led them to increase full year expectations for the segment on both the top and bottom line. On the earnings call, management noted that backlog was down slightly but demand remains very strong. When asked about EBITDA margins for the segment, CEO Jose Mas had this to say:

I think our visibility around the revenue in oil and gas is actually really solidified for us not just for the balance of 2024, but actually as we look at 2025 and 2026. A lot of conversations with customers about their plans. We feel really good that we're going to be in that mid-double-digit area. We've consistently been at 15% or better for a long time. And I think that we're going to be able to maintain that for a longer period of time and that's great visibility to have versus where we've been in the last couple of years.

Another area of particular highlight was in clean energy and infrastructure. Total backlog from the company increased about $400 million compared to last quarter to $12.8 billion, where projects under limited notice to proceed was over the $2 billion mark. Over the next few quarters, this should be reflected in the results and contribute to growth in the clean energy segment. In particular, renewables is leading the way with enhanced visibility as a driver of added generation. From 2020 levels, McKinsey estimates that by 2026, global renewable-electricity capacity will rise more than 80%, which about 66% coming from wind and solar. Data centers are also a part of the segment's growth, albeit a much smaller contribution.

In terms of the outlook for MasTec, management is guiding for $12.55 billion in revenue and $975 million in adjusted EBITDA for the full year. EPS is expected to turn positive to $2.95 per share.

Over the past few years, MasTec has been focusing its portfolio to be positioned in more growthier parts of the market. To do this, the company embarked on a few acquisitions, specifically in utilities and renewable energy. One of the largest ones was in 2022 when the company acquired Infrastructure & Energy Alternatives (IEA) for $1.1 billion.

Even though the oil and gas business has remained particularly strong recently and the medium term outlook looks solid, the long-term opportunities in electric utilities and renewable energies from an M&A standpoint is where management has focused their capital allocation priorities. We also see this in how the oil and gas segment's share of EBITDA has changed over time. Even with the growth this quarter, the Oil and Gas segment today still makes up a smaller percentage of EBITDA compared to 2021, before the IEA acquisition, among many others.

Across the communications segment, I think the outlook remains pretty strong. In communications, MasTec is poised to benefit from the 5G capex wave where wireless and wireline customers spend more on their fiber builds. As the telecommunications companies deploy their next wave of capex on this cycle, MasTec should gain a share of this growth over time.

From a balance sheet perspective, MasTec has a decent balance sheet that has some leverage embedded. At quarter end, the company had a Total Debt to EBITDA ratio of 2.7x, which was down from 2.9x from FY'23 (source: S&P Capital IQ). With a Debt to Equity ratio of 23%, the company has an adequate amount of leverage in the capital structure. Most of the debt is fixed rated debt with all maturities in 2027 and beyond. Per guidance, management is targeting a ratio in the low 2s range, which they expect to achieve by year end. The debt reduction target should allow for more flexibility in capital allocation, particularly with respect to M&A.

Valuation and Wrap Up

Based on the 13 analysts who cover MasTec's stock, there are 9 'buys' and 4 'hold' ratings. The average price target is $116.23, with a low estimate of $93.00 and a high estimate of $135.00. From the current price to the average price target one year, this implies about 8.6% upside suggesting mediocre upside from the current price.

Compared to construction and engineering peers in the industry, MasTec trades at a small discount on a forward EV/EBITDA basis but at a premium on a forward P/E basis. On financial metrics, the company has lower ROE, lower EBITDA margins, and higher leverage compared to the peer group average, so I believe a discount to the peer group is warranted. In fact, in light of this, I would have expected a wider differential on a forward EV/EBITDA basis.

As somewhat of a cyclical stock, MasTec's valuation multiples tends to ebb and flow with the economic cyclical. As such, its traded in a wide range between 2.4x and 13.9x EV/EBITDA, with an average ten-year multiple of 7.3x EV/EBITDA (source: S&P Capital IQ). At 6.8x EV/EBITDA, MasTec's valuation is slightly below the ten-year average by 0.5 turns.

Overall, I don't find MasTec's valuation to be particularly compelling. At the current multiples, why this may not seem expensive on a EV/EBITDA or P/E basis, MasTec is a business with heavy capex requirements. For example, on LTM EBITDA of $818.5 million, the company spent $155 million in capex and $234 million interest, leaving not much leftover for equity holders (source: S&P Capital IQ). While management doesn't' provide guidance on capex, I suspect that capex will remain elevated in the near term given most of that capex was maintenance capex as opposed to growth capex.

So would I buy shares today? No, probably not. I'd be leaning more towards waiting for a pullback. For a company like MasTec, that's been the superior strategy over time, in my view, since over the last five years, there's been three times the company went down 40% or more in less than a year. And chasing a stock when it's already run up 117% since the October 2023 lows makes little sense to me, especially when I don't feel that the valuation warrants taking a position. As such, I rate shares as a 'hold' but will continue to monitor the company (as well as the share price) to wait for an opportunity, given that I like the long-term fundamentals.