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MasTec: Record Backlog, Margins Under Pressure but the LT Transition & Outlook Remains Intact

Late last week Mastec (MTZ) released Q2/2022 financial results which were highlighted by revenues of $2.30B (consensus $2.23B, $1.96 in Q2/2021) and adjusted EPS of $0.73 (consensus $0.72, $1.29 in Q2/2021). Though the impact of cost pressures and inflation have eaten into the increasing margin narrative, the underlying story remains unchanged as the transition from oil & gas revenues continues to wind down while the uptake in electrical transmission and clean energy/infrastructure continues to gather momentum. Additionally, at $11.0B (+$360M sequentially), the eighteen-month backlog has reached yet another record level. Though the financial disclosure was largely a non-event (largely already pre-released a week earlier), FY/2022 revenue guidance was maintained with revenues on course to reach a record $9.20B while owing to the impact of cost inflation (mostly fuel and supply chain issues), adjusted EBITDA margins and adjusted EPS were reduced to 8.2% (prior 9.4%) and $3.09 (prior $4.35) respectively.

Owing to some closing oil & gas contracts, that division contributed 14.8% of quarterly revenues, a far cry from the approximately 40% in the previous years until 2019. The push into the Clean Energy and Infrastructure segment continues to ramp as the company announced the acquisition of Infrastructure and Alternative Energy Inc. (IEA), for $1.10B or approximately 6.5x FY2023e 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. Approximately 75% of the transaction will be financed with cash, while management is expecting to issue approximately 2.8M shares of MTZ. The deal is expected to close in late 2022 and be immediately accretive (FY/2023e EBITDA contribution expected between $160M-$170M, net income contribution between $45M-$50M). That said, 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 ETITDA estimates along with lower 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.

The corporate pivot out of the oil & gas pipeline sector has to remain 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 telecommunications) a more favorable contracting mix trending towards MSAs has and will continue to drive decreased cyclicality, increased recurring revenue and with it, eventually higher margins. In light of the U.S. Senate approving the long awaited $750B bill with record provisions to fight climate change, we believe that MasTec’s rash of acquisitions since last summer will only position them to gain an even more dominant market position in the years ahead.


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