Updated: Nov 6, 2022
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We continue to highlight our power focused investment thesis which revolves around the theme of energy transformation, both in power generation and delivery, as the country transitions to a carbon neutral economy. Post Q3/2022 results, we highlight one of our top infrastructure picks, MasTec (MTZ). After the close on November 3, the company provided strong Q3/2022 financials but even better guidance and yet another record for backlog. Specifically, revenues of $2.51B were inline with estimates while an adjusted EBITDA figure of $245.6M and adjusted EPS of $1.34 topped expectations. Specifically, non-oil & gas revenues grew by 38% Y/Y and 9% sequentially, while adjusted EBITDA grew by 75% Y/Y and 38% sequentially. More importantly, Q4/2022 guidance for revenues increased by over $400M (now $2.9B and including IEA) while adjusted EBITDA increased by $22M to reach $257M. Continuing a streak dating back to Q4/2021, the 18-month backlog hit another all-time record at $11.2B (+$200M sequentially). Given the strong fundamentals and guidance, the stock popped post earnings release and ended the day +17.2%. Now that a recent spree of acquisitions is behind them, we believe that going forward, the share price weakness will alleviate as the company shifts towards internal efficiencies and integration, given a very compelling macro backdrop.
Our thesis remains as the revenue mix continues to evolve to higher margin segments such as Electrical Transmission along with Clean Energy & Infrastructure which made up a combined 49.8% of Q3/2022 revenues, as compared to 49.5% last quarter and 36.3% for FY/2021. We do highlight that the margin expansion story has taken a bit of a pause given this past summer’s acquisition of Infrastructure and Energy Alternatives (IEA) for a combined cash and stock valuation $1.1B (or for approximately 6.5x FY/2023e EBITDA). IEA is a civil and renewables contractor which will expand MasTec’s footprint into new geographies and with new customers primarily in the renewables sector. With a workforce of nearly 6,000, IEA is believed to be one of the top 5 renewables contractors (solar & wind) in the U.S. Note that in all of the company’s serviced sectors (including Communications and O&G), not only can Mastec provide the necessary build capabilities, it also provides the recurring maintenance and services needed to maintain the infrastructure over the long term.
That said, Mastec’s expanding capabilities in the renewable and civil sectors via the IEA acquisition will further position the company well in order to benefit from the North American energy transition and ESG focus. All of this under the context of federal infrastructure bill spending. It is important to keep in mind that this latest acquisition has been MasTec’s third sizeable acquisition since last summer (following acquisitions within the electrical grid sector - Henkels & McCoy for $600M and INTREN for $420M, both averaging a 7.9x NTM EBITDA acquisition multiple). Given the acquisitions, we’ve seen some deterioration in 2022E EBITDA margins. Execution risk integrating all these new acquisitions will be key going forward but the shift to prioritize the renewable and grid verticals has been clear. Backlog was particularly strong, reaching yet another all-time high at $11.2B (compared to $11.0B last quarter and $8.6B in Q3/2021. This figure was particularly strong in the Electrical Transmission segment (Power Delivery) where orders grew by 33%.
The eventual corporate pivot placing less emphasis on the oil & gas pipeline sector remains paramount to the longer term investment thesis. As MasTec shifts further to a more favorable business mix trending towards markets with longer term secular growth (renewable generation, electric utilities, grid modernization and 5G telecommunications) a more favorable contracting mix trending towards Master Service Agreements (MSAs) has and will continue to drive decreased cyclicality, increased recurring revenue and with it, eventually higher margins. Recent share weakness due to the acquisition spree has created an even more compelling story when viewed in context with peers:
Our power related investment focus remains three-pronged: 1) ESG power generation (zero carbon and renewable), 2) the needed fuel to power nuclear reactors (uranium), and finally 3) the badly needed infrastructure and electrical transmission investments needed to upgrade an extremely old grid network. This is prescient given the strains of variable renewable energy intake coupled with increased charging demand from EVs. Our favored picks over the entire value chain include the following:
We continue to highlight our power focused investment thesis which revolves around the theme of energy transformation related to both to both power generation and delivery, as the country transitions to a carbon neutral economy. We feel that MasTec has both the stable customer base to provide recurring cash flow while also angling to become a leader in much higher growth verticals related to clean energy infrastructure and grid modernization.