Do These Utility Infrastructure Stocks Have Upside?
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One of the better-performing sectors of the economy, along with auto and housing, has been utilities/industrials. According to the Board of Governors of the Federal Reserve System, industrial production by utilities rose 10.5% year-over-year through Mar. 31. This is a trend that may persist for several years, as electric and gas utilities spend on projects to upgrade and improve the efficiency of their distribution systems.
Related stocks have already been bid up in many instances. Nevertheless, there might be some opportunity for investors to be rewarded. Some of the top names with large proportions of their operations in this sector are as follows:
With a strong presence in the communications industry, Mastec (NYSE: MTZ) names among its biggest customers the likes of AT&T and DirecTV. It also operates sizable oil & gas, power generation and industrial, and electrical transmission businesses. Revenues grew across each major unit in 2012, driving up earnings.
Management boasts a 10% increased backlog from the end of 2011, including orders for the next 18 months. It points to a high level of oil & gas and electrical demand over the next several years. Importantly, MasTec is investing in equipment to support growth, as it intends to boost capital expenditures to $100 million this year.
Certainly, MasTec is aiming to capitalize on favorable trends in the wireless networking market, as well as the planned enhancement of natural gas output in the U.S., and "smart grid" construction (the much needed modernization of the national electric grid).
MasTec shares look attractive in light of the company's profit outlook and its strong market position. A key factor impacting its earnings consistency is the timing of project spending by industries served, adding some risk to the equation.
Primoris Services (NASDAQ: PRIM) also reported a substantially higher, specifically 16% greater, boost to its backlog at year-end 2012. This is more of an underground construction entity, repairing and replacing pipelines and other infrastructure. Its largest revenue contributions are derived from utility companies, both gas and electric. The Dallas-based firm also lists the Louisiana Department of Transportation as a major client.
Like with MasTec, bottom-line growth should benefit in 2013 from heightened domestic natural gas production and utility infrastructure investments. Plant construction and highway construction ought to be contributors to earnings advances, as well. Again, spending patterns will play a part in actual income gains, but I think it is likely in store for another good year.
Managment sees solar, diesel, and other energy-efficiency related tasks as potentially lucrative. In the meantime, the project forecast seems solid, and Primoris shares could be a good bet for near-term growth or a long-term portfolio.
Quanta Services (NYSE: PWR) is possibly the largest company focused predominantly on electric and gas infrastructure at a $5.8 billion market capitalization. Its recognition has garnered it a premium valuation to its peers. Shareholders should be prepared for ongoing earnings advances, based on a 17% higher 12-month backlog year-over-year and the possibility of further pipeline contracts yet to be announced.
Quanta's core business is, in fact, electric power, and its prospects are very healthy for the current year. Even without emergency-related income, which it realized a significant amount of in 2012, the company should fare nicely.
However, the capital appreciation potential in Quanta Service's stock may be more as a three to five year holding. It is banking on the transition from coal to gas, and shift to renewables, as catalysts for spending over the long haul. It is also stepping up activity related to its pipeline shale gathering processes with projects targeted for mid-2013 and 2014.
Summing it up
Thank you for taking the time to peruse these electrical infrastructure stock choices. While their profitability is bound to be choppy due to spending trends, regulatory actions, and other factors, the overall direction of earnings should be upward over the next few years. Of the three, I prefer Primoris, given its growth strategy and substantial electric and gas power customer base. MasTec is also attractive as a play on wireless networking, while Quanta is a leader in electric infrastructure that should bring long-term price gains.
Damon Churchwell has no position in any stocks mentioned. The Motley Fool recommends MasTec. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!