Quanta Services Stock: Beneficiary Of Modernizing The Grid (PWR)


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Quanta Services (NYSE:PWR), a leading provider of specialty contract services to the electric and gas utilities, renewable energy, communications and energy industries, is at the forefront of modernizing America’s electric grid. Network modernization refers to the upgrades required in the power supply Grid to adapt to the technological changes occurring in the generation, transmission and distribution of electrical energy as a result of the increase in the capacity of renewable energies, in particular wind, solar, geothermal and hydroelectric power.

Renewable energies are the future

According to the US Energy Information Administration (‘EIA’), renewable energy (primarily wind and solar) will become the leading source of energy in the United States over the next thirty years.

Renewable energy

US Energy Information Administration

With this in mind, in 2021 Quanta acquired Blattner Holding Company, one of the largest and leading providers of renewable energy infrastructure solutions in North America, significantly expanding its services to the renewable energy generation industry. In the first half of 2022, Quanta’s renewable energy segment grew to 22% of total revenue from 13% in 2021. It’s now the company’s fastest-growing division, with segment revenue up 151% over the past year. For fiscal year 2022, the company expects total revenue to grow 29% to $16.8 billion. In the most recent quarterly report, Duke Austin, CEO of Quanta, commented:

Our solid financial performance in the first half of 2022, coupled with our record 12-month order backlog, ongoing active client engagements and robust end-market momentum, reinforces our confidence in our consolidated financial guidance for the full year 2022.

Even with the renewable energy segment growing to 24% of revenue by year-end 2022, the Electric Power Infrastructure Solutions division, which serves electric utilities, remains the main source of revenue as the company helps utilities improve their capabilities.

revenue mix

Quanta Services

These energy demands are largely driven by 5G, electric vehicles, cloud/data centers, the Internet of Things and connected objects, and smart cities. The company has seen this need for years and has incorporated it into its multi-year financial goals:

Our customers’ multi-year programs to modernize and strengthen utility infrastructure, as well as their initiatives to transition to a low-carbon economy, continue to drive demand for our services and provide additional growth opportunities. In particular, we see growing demand for our renewable energy generation and infrastructure solutions in 2023 and beyond, giving us continued confidence in our multi-year financial targets.

Some of that demand can be seen in the company’s backlog for its services.

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Quanta residue

Quanta Services

As you can see from the table above, Renewable Energy has the largest backlog in remaining performance obligations, showing the strength of this business segment. It also has the smallest estimated orders, reflecting this segment’s infancy for the company.

Opportunities abound

One of the main drivers in the modernization of the national electricity grid is electric vehicle (EV) charging stations. With the expected increase in EV sales over the next decade, demand for electricity to charge EVs will follow suit. This has led to opportunities for Quanta’s services to:

In July 2022, Quanta signed a master services contract to provide turnkey engineering, construction and program management solutions in support of the deployment of a national DC electric vehicle fast charging network. This program brings together one of the world’s largest automakers, North America’s largest travel center operator and the nation’s largest public fast charging network for electric vehicles. These companies are collaborating on the fast charging network, which is expected to include up to 2,000 DC charging stations in hundreds of travel locations across the United States. Quanta expects to begin engineering work on this program later this year, with construction scheduled to begin in 2023.

The company sees another opportunity in the aging workforce of the utility companies. The supply industry today suffers from a shortage of journeymen and skilled workers. Quanta’s customers need specialized labor to support their aging utility workforce.

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To meet this need, in 2018 Quanta made a strategic acquisition of Northwest Lineman College (‘NLC’), a post-secondary educational institution that provides training programs for the power infrastructure, communications and underground utilities industries. The institution specializes in training electrical workers in utility tasks. The Company owns and operates NLC to find skilled workers to provide outsourced utility infrastructure services.

Quanta believes this trend may continue to the extent that labor demand will exceed supply. As the largest employer of skilled trades in the industry and with the acquisition of NLC, Quanta is uniquely positioned to provide critical infrastructure services related to connectivity and electric power.

Underlying these opportunities, according to Goldman Sachs (GS), is a $3 trillion total addressable market driven by megatrends from renewable energy and electrification to battery storage and electric vehicle chargers.

TAM

Goldman Sachs

risks remain

Despite the opportunities arising from the demand for renewable energies and the expansion of the electricity grid, risks remain. For one thing, Quanta relies on skilled craftsmen and experienced operators to successfully run its day-to-day operations. In addition to the ongoing need for skilled workers, pay and working conditions are always potential labor issues that can impact costs and/or delay the delivery of services.

Second is the highly regulated environment of the utility industry. Quanta serves clients such as Duke Energy (DUK), PG&E (PCG) and Southern Company (SO) that are regulated at the federal, state and local levels. A particular risk is possible changes in environmental legislation. Another reason is changes in regulatory requirements that could affect the company’s ability to serve these markets.

Quanta seeks to mitigate these risks through strong relationships with its unions and customer base.

analysis

Buy rating: I have a buy rating on Quanta Services with a three-year price target of $237 per share.

Given the continued increase in power demand over the next decade, I believe Quanta can grow revenue by 20% over the next three years, driven by growth in the renewable energy segment. This would increase Quanta’s revenue from an expected $16.8 billion in the current fiscal year to $28 billion by 2025 and $12 billion in 2021.

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As infrastructure services for renewable energy companies grow, I expect the company can grow its net margin to 4% over time, as these services tend to be more specialized and technology-based and generate higher margins for the company.

In terms of the stock’s valuation, the growth in the company’s earnings will actually cause its price-to-earnings (P/E) ratio to decline during this period, making the stock more attractive to investors.

Below is a table that compares Quanta’s current metrics and share price to the 3-year estimate:

Quanta Services

Current* (as of 09/19/22)

3 year estimate

Revenue (in millions)

$15,474

$28,685

Net Margin (%)

2.92%

4.0%

Net income (in millions)

$451.82

$1,147

# Outstanding shares

146,695,000

145,190,000

net earnings per share

$3.08

$7.90

price-to-earnings (P/E) ratio.

45.9

30

Stock price

$141.28

$237

Company metrics source: Morningstar, Quanta Services

*Current metrics based on Q2 TTM 2022 results.

Electricity demand will drive the stock

As demand for electricity continues to increase, utility companies must make significant investments to meet these demands. It is estimated that 70-200 gigawatts (‘GW’) of new power generation will be required by 2030, and an additional 200-800 GW from 2030 to 2050. Current power generation capacity in the United States is 1.2 million megawatts or 1,200 GW (1 GW = 1,000 megawatts). The majority of this new power generation is to come from renewable sources. This equates to approximately $30-$90 billion in additional investment by 2030 and $200-$600 billion by 2050.

As a leading provider of utility infrastructure services, Quanta will play a critical role in meeting these needs. As a result, Quanta’s stock will see positive participation if these secular trends continue over the next several decades.



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