MasTec, Inc. (NYSE:MTZ) has good growth prospects ahead, driven by secular and regulatory tailwinds across its end markets. In the communications segment, revenue growth should benefit from the ongoing expansion of 5G infrastructure and federal funding under the BEAD and RDOF programs. Further, megatrends like sustainability and clean energy transition, supported by federal incentives like the Inflation Reduction Act, should drive revenue growth in the clean energy and infrastructure segment. Additionally, strength in the Oil and Gas segment driven by the increasing need for energy independence, and secular demand drivers in the Power Delivery segment including the buildout of data centers and the need for power transmission investments should contribute to revenue growth in the coming quarters. In the medium to long term, a potential reversal in the interest rate cycle should result in a swift recovery in the company’s revenues.

While the project execution issues, particularly in the IEA business, have impacted the company’s margins, I believe these headwinds are largely behind us and the margins should benefit from good bid discipline and execution in the coming quarters. Further, strong end-market demand should result in good pricing power for the company, which should support margins growth. In terms of valuation, the stock is trading at a discount to its peer, Quanta Services (PWR). As the company’s execution improves, and it benefits from solid end-market demand, I believe its P/E multiple could see a re-rating. Given the company’s good growth prospects and the potential of valuation multiple re-rating, I have a buy rating on MTZ stock.

Revenue Analysis and Outlook

In recent quarters, the company has experienced weakness in its Communications and Power Delivery segments due to customers delaying projects as a result of higher financing costs. Further, project deferrals in its Clean Energy and Infrastructure segment have also impacted revenues. However, increased project activity in the Oil and Gas segment has positively impacted revenue growth in recent quarters.

In the first quarter of 2024, the company’s revenue increased by 4% Y/Y on a reported basis as well as organically to $2.68 billion. This was mainly due to 147.1% Y/Y revenue growth in the Oil and Gas segment, driven by project timing-related increases in large diameter and midstream project activity, which effectively offset the reduction in pipeline integrity services.

In the Communications segment, revenue declined by 9.1% Y/Y due to reduced levels of wireless, wireline, and install-to-the-home project activity caused by lower demand and customers postponing projects. This was partially offset by increased utility project work.

In the Clean Energy and Infrastructure segment, revenue decreased by 8.7% Y/Y due to reduced renewable and certain industrial and other infrastructure project work, partially offset by increased civil project activity.

The Power Delivery segment’s revenues were down 19.5% Y/Y due to project deferrals from the utility customers, resulting in lower transmission and distribution-related project work. This decline was somewhat offset by an increase in substation-related project work.

Looking forward, the company’s revenue outlook is positive given several growth drivers across its end markets.

In the Communications segment, the company is poised to benefit from ongoing expansion in 5G infrastructure. The company is also poised to benefit from the increased scope of its core wireless work with its key client, AT&T (T). On its last earnings call, management commented:

We significantly expanded our relationship with our biggest customer, AT&T. AT&T expanded both our scope and geographic territory on our core wireless work. This expansion, coupled with their announcement of a complete swap out of Nokia equipment to Ericsson equipment over a 5-year period is expected to significantly increase our wireless business over the next few years. While we'll see some impact during the first half of this year, it will mostly be site acquisition and engineering work. The work we are doing now is what is creating workable backlog for the second half of the year. So our visibility is excellent.”

In addition to good growth in the wireless business, the outlook for the wireline business also remains solid, driven by funding under the Broadband Equity, Access, and Deployment (BEAD) program and the Rural Digital Opportunity Fund (RDOF). The $42.45bn BEAD funding and $20bn RDOF funding address the increasing need for equitable access to networks with low latency and high speed across the geographies and demographies.

The company’s communication backlog reached ~$5.8bn (up 3.5% Y/Y) at the end of Q1 2024 and I anticipate positive growth in both revenues and backlog moving forward given the strong demand drivers.

The medium to long-term trend in the company’s renewables and clean energy business also remains solid, given the sustainability megatrend and global transition towards clean energy. In addition, regulatory tailwinds like the Inflation Reduction Act and tax credit transferability are expected to further catalyze this market. MasTec has done a good job in terms of increasing its exposure toward this market through strategic M&A in recent years (eg IEA acquisition in 2022) and the company is well-positioned to capitalize on this trend.

The increasing shift towards renewables is also expected to drive significant demand for the company’s power delivery segment. The CAPEX from power utilities is expected to remain robust given the increasing demand for power from data centers, the requirement of new transmission capacity for remote solar and wind projects, and investment in grid resiliency.

Finally, in the company’s Oil and Gas business, the need for energy independence in the wake of recent geopolitical tensions is expected to drive long-term demand, especially for LNG pipelines in the U.S. Further, the company’s leading position in pipeline installation and maintenance also positions it well for green hydrogen infrastructure as this technology goes mainstream. The recent commissioning of the Mountain Valley Pipeline (MVP) should also be a near-term positive, since larger projects like these typically have completion-related payout, which may benefit the company’s Q2 results.

One good thing about MasTec is that it is hedged against the outcome of the upcoming presidential election. There is a general belief, if Republican nominee Donald Trump wins, it will be positive for the Oil and Gas industry and if President Biden wins, Clean Energy investment should benefit. MasTec with exposure to both segments offers some natural hedge against either outcome.

Overall, I remain optimistic about the company’s growth prospects. MasTec’s revenue should benefit from secular and regulatory tailwinds across its end markets including increased investments in 5G infrastructure, federal funding under BEAD and RDOF programs, sustainability megatrend, transition to clean energy and federal incentives like IRA supporting it, increased requirement of investment in power transmission, and the need for energy independence. While high interest rates have caused some near-term headwinds, I believe we are close to peak interest rates, and once the interest rate cycle reverses, it should result in a swift recovery in the company’s revenues over the coming years.

Margin Analysis and Outlook

In Q1 2024, the Communications segment’s adjusted EBITDA margin declined by 100 bps Y/Y due to operating deleverage on lower revenues. In the Power Delivery segment, the adjusted EBITDA margin contracted by 210 bps Y/Y as a result of reduced productivity due to the impact of increased overhead costs incurred to maintain operating capacity as well as operating deleverage on lower revenues.

Conversely, adjusted EBITDA margin in the Oil & Gas segment and Clean Energy & Infrastructure segment expanded by 890 bps Y/Y and 140 bps Y/Y, respectively, attributed to improved efficiencies and favorable project mix. The margins in the Oil & Gas segment also benefited from operating leverage on higher revenues.

On a consolidated basis, margin expansion in the Oil & Gas and Clean Energy & Infrastructure segments effectively offset the margin contraction in the Communications and Power Delivery segment and resulted in a 190 bps Y/Y increase in adjusted EBITDA margin to 5.9%.

In recent years, the company’s margins have been impacted by project execution issues, especially in its business related to the IEA acquired in 2022. The stock price also has seen a good deal of volatility as a result. Whether these headwinds are behind us is a key debate going on among investors.

I believe the headwinds related to project execution in the IEA business are likely behind us. I believe most of the project issues in the IEA business were related to orders prior to MasTec’s IEA acquisition. It has been almost two years since the acquisition was completed, and the backlog related to those projects should be complete by now. The integration over the last two years should have also improved MasTec’s learning curve with new customers, and most of the key decision-making positions in IEA business would now be under legacy MasTec employees. So, I am expecting good execution and bidding discipline moving forward, which should help in margin recovery.

The secular demand drivers in the coming years should also result in tighter demand/supply and higher margins in the orders/backlog. The company should also benefit from operating leverage due to higher sales, as the growth outlook is positive.

Overall, I expect MasTec’s margins to improve moving forward with problem projects in IEA likely behind us, better bid discipline and execution, and strong end-market demand giving the company better pricing power.

Valuation and Rating

MasTec is currently trading at a FWD EV/EBITDA of 11.54x which is at a discount to its larger peer Quanta Services which is also exposed to similar end market growth trends and trading at a FWD EV/EBITDA of 18.57x.

MTZ stock has meaningfully underperformed PWR stock since early 2022 due to execution issues, and this has resulted in ~7 points lower EV/EBITDA multiple for MTZ.

With a potential improvement in execution and margin in the coming years, I expect MTZ to see some re-rating and this valuation difference to narrow. There are only a few large contractors with experience and deep relationships with telecom and utilities. With demand poised to increase meaningfully in the coming years and likely to outpace supply, I expect meaningful growth for all of them in the coming years. PWR’s valuation is already reflecting it and, as MTZ’s execution improves, it should also re-rate based on the solid demand outlook. Hence, I have a buy rating on the stock.

Risks

• My thesis anticipates the company’s revenues benefitting from a potential reversal in the interest rate cycle. However, if the interest rate remains higher for longer than expected, it may impact the end market demand and could delay the anticipated revenue recovery.
• While I expect the margin improvement from good bid discipline and execution, if the company continues to face project execution issues and has to incur costs related to it, it may negatively impact the margins.

Takeaway

I believe the company has good growth potential over the coming years. Revenue growth should benefit from secular and regulatory tailwinds across its end markets, including increased investments in 5G infrastructure, federal funding under BEAD and RDOF programs, megatrends like sustainability and clean energy transition supported by federal incentives like IRA, an increased requirement for investment in power transmission, and the need for energy independence. Further, a potential reversal in the interest rate cycle should result in a swift recovery in revenues in the medium term. With project execution issues in the IEA business likely behind, the margins should improve due to good bid discipline and execution. Further, strong end-market demand should provide good pricing power and contribute to margin expansion. Moreover, the stock is trading at a discount to its peers. As the company’s execution improves, and it benefits from solid end-market demand, I believe its valuation multiple can see a re-rating. So, I have a buy rating on MTZ stock.