Supplemental Stock Analysis: Quanta Electric Services

Supplemental stock analysis

Quanta Services: (PWR)

Group 6

        Quanta services provides engineering, procurement and construction services (EPC) for the comprehensive infrastructure needs in the oil and natural gas industries that serve in the US, Canada, Australia and other international markets. The services PWR provide include the design, installation, upgrade, repair and maintenance of infrastructure within each of the industries we serve, such as electric power transmission and distribution networks, substation facilities, renewable energy facilities, pipeline transmission and distribution systems and facilities. They also provide infrastructure services for the offshore and inland water energy markets. PWR owns a fiber optic telecommunications infrastructure in select markets and license the right to use their fiber optic telecommunication facilities to customers.
        PWR has a PE ratio of 20.30, greater than the industry average of 15. While this is a strong PE, PWR does not pay a dividend. This is not ideal, it isn’t uncommon, as half the companies in this analysis do not pay a dividend either. The average dividend yield is .021, so very small. I assume that manufacturing companies use a lot of materials and a lot of consumption. With a lot of materials and asset turnover, costs can be difficult to manage, so it would make sense that any income after taxes and interest are paid would be reinvested, as it would be too small to pay a dividend.
        The projected growth rate according to the FCFE and FCFF is currently 12% for the next two years, then rises to 16% for the following three, then declines each year until a 10 year forward of 3.5%. I find it difficult for any company, regardless of industry, to experience growth of >10-15% for 5+ years. After changing these growth rates to a more conservative, but still large 7%, I am coming up with a stock price that is roughly $7 under the expected price of FCFE and FCFF, $30.87 to $24.63, and $33.36 to $25.65, respectively.
        I think investing in engineering firms is a smart decision for long term, low risk. There is always projects, and there is a lot of intellectual property owned by firms like these, which is a huge moat. If I were to invest in engineering firms, I would prefer a firms that pays a dividend, even if they were small. PWR looks like a good firm, with a strong PE, decent margins, and a positive free cash flow, but there is nothing that I can see that sets them apart to make them a strong buy, which is why I believe they are fairly valued, and would give them a non-buy.