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PWR
Taylor Floyd, Johanna Marcelia, & Joe Schwalbach
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Current Price: $19.95 Target Price: $29.76 Recommendation: BUY Upside: 49.2%
Recommendation
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Ticker: PWR (NYSE) Market Cap: $3.98 Billion Beta: 1.15 Sector: Industrials – Engineering &
Construction 52 Week High: $35.33 52 Week Low: $18.46 Analyst Target Opinions: $22 - $30
Company Overview
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Provider of specialty contracting services
Offer infrastructure solutions
Two Segments:◦ Electric Power◦ Natural Gas &
Oil Pipeline
Company Overview
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Electric power transmission & distribution networks
Substation facilities Renewable energy facilities Pipeline transmission and distribution
systems & facilities Offshore and inland water energy markets
Contracting Services
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Puget Sound Energy Northeast Utilities System Kinder Morgan, Inc. ConocoPhillips ExxonMobil Corporation United States Department of Defense Google Inc.
Representative Customers
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Revenues
• Largest energy infrastructure specialty contractor in North America
• Track record of safe execution• Preferred Vendor• Low Price Point = Additional Contracts
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Electric Power & Distribution
Strong relationships with the majority of US investor-owned utilities and Canadian utilities—many going back for decades
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Electric Outlook
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Electric Outlook
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Repairs and upgrades to N. American infrastructure◦ Transmission spending: 3x higher than historical
Regulation-driven grid investment Change in generation mix
◦ Renewables◦ Natural Gas
Electric Growth
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Oil & Gas
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Oil Outlook
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Gas Outlook
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Oil & Natural Gas Pipeline Outlook
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Unconventional shale harvesting Lack of takeaway capacity Shift from coal to gas generation LNG exports
Oil & Gas Growth
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As the largest player in their industry they have grown through strategic acquisitions
Acquisitions◦ Enter new markets (LNG)◦ Establish market share in new regions (Canada)◦ 9 in 2014, 6 so far in 2015
Regulation=opportunity
Preferred vendor
Growth
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Management Team
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Debt Metrics
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Profit Margins
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Arbitration expense and drop in oil prices greatly impacted 2014 EPS
Share repurchase program◦ 2013-2015 repurchased $500 million worth of shares◦ August 2015-2017 new repurchase program of $1.25
billion
Sold Fiber Optic Segment for $1 billion cash. ◦ Would have required significant capital expenditure to
maintain high profit margin◦ Completed Transaction August 2015
Recent Events
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Earnings release this morning pre-market
The consensus EPS forecast for the quarter is $0.25. The reported EPS for the same quarter last year was $0.59.
Steep drop in October caused by a downward revision of Quarter 3 earnings◦ Combination of poor weather, project delays due
to regulation, and low energy demand.
Q3 Earnings
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Political climate impacts pipeline demand◦ Canadian PM Trudeau supports Keystone and updated pipeline
infrastructure
Difficulty obtaining skilled labor in certain service regions
Cancellation of contracts in poor economic environment
Regulations: licensing, building codes etc. may impact ability to complete projects
Rely on good weather and other companies’ approval of capital budgets
Deferred taxes will have to be paid eventually
Potential Risks
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Largest player well-poised in a growing industry
Low debt and ability to self-finance & strong balance sheet
Well-established relationships with broad customer base
3 Certainties in Life: Death, Taxes, and… …Demand for Utilities!
Investment Thesis
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Historical Financials2010 2011 2012 2013 2014
Revenue Growth N/ A 17.62% 28.04% 10.18% 20.37%Operating Margin 14.84% 14.14% 8.49% 8.50% 6.51%Effective Tax Rate -15.23% -9.65% -31.59% -39.31% -30.77%Depreciation & Amortization 3.23% 2.78% 2.51% 2.36% 2.36%Capital Expenditures 3.66% 3.51% 3.54% 4.04% 3.84%NWC as % of Revenue 14.20% 14.46% 15.64% 12.01% 15.73%
Global AssumptionsShares Outstanding (millions) 204.2 Risk-free rate 2.23%Price Per Share 19.95$ Beta 1.1552 Week Low 18.46$ 52 Week High 35.33$ Analyst Opinions - Low 22.00$ Analyst Opinions - High 30.00$ Credit Rating 9.23 Alt. Cost of DebtCurrency Exchange Rate 1.00x 1 unit = x dollars
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Questions?
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Beat on Earnings: $.30 (20%)
Miss on Revenues: $1.94 b (-9.6%)◦ Electric Power Infrastructure: -15.3%◦ Oil and Gas Infrastructure: 0.9%
Divested from fiber optic operations for $1 b◦ After tax net proceeds: $830 m
Q3 Update
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New mainline pipe projects: $800 m
Record backlog◦ Q/Q up 34%◦ $9.65 b
CAPEX: $210-$220 m vs. $247.2 m (2014)
Q4 2015 Margins◦ 4-5% Oil & Natural Gas◦ 7-8% Electric
$2 t industry infrastructure investment by 2030
Outlook
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Largest player well-poised in a growing industry◦ Market Share: 44.92%
Low debt and ability to self-finance & strong balance sheet
Well-established relationships with broad customer base
3 Certainties in Life: Death, Taxes, and… …Demand for Utilities!
Investment Thesis
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PWR- Q4 2015 Update
Taylor Floyd, Johanna Marcelia, & Joe Schwalbach
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Background◦ Construction maintenance & transportation services for
electricity, natural gas, & oil Safety, consistency, specialized workforce
◦ Decentralized business model◦ 11 acquisitions in 2015
Electric power infrastructure (8)
Project delays◦ Severe weather ◦ Collapse in oil prices & effect on Canadian economy◦ Challenging permitting environment
State approvals, laws and regulations
Q4 Update
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Drivers that cut revenues◦ Foreign hedging losses◦ Decrease in backlog projects completed
Operational strategy◦ Aging power line infrastructure & reliability
challenges ◦ Cut SG&A◦ Many key customers have plans for upgrading &
expanding transmission and distribution infrastructure
2015 Recap
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Beat on Revenue: $1.9B (6.1%)◦ Electric Power Infrastructure: (-6.9%) ◦ Oil and Gas Infrastructure: (7.8%)
Beat on EPS: $0.30 (7.1%)
Full Year◦ Revenue: $7.57B (-2.3%)◦ EPS: $1.59 (17.8%)
Earnings Release
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Revenues may decline by low single digits in 2016.
Head count reduction and shifting equipment Facility strategies to adjust to the current market
environment shifting equipment FERC Order 1,000 Lower growth in large transmission, more
growth in sub-transmission and distributive work.
Electric Power Outlook
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PWR foresees $40 oil price by December 2016
15% of their business is impacted directly by oil prices◦ Expect single digit margins; have some hedges
Fewer big projects in Canada: pipeline, not electric transmission
Oil & Natural Gas Outlook
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Rank of quarters from lowest to highest revenue generators: Q1, Q4, Q2, Q3.
Limited free cash flow in first half of 2016
Anticipate both organic and acquisition driven growth.
Continuing share buyback program of 10 million shares by April 2016 (included in EPS estimates for 2016)
Overall
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Price Target: $24.75 Upside
◦ From Purchase: 18.6%◦ From Current Target Price: 16.7%
Deutsche Bank: $24.00 JP Morgan: $23.00
Price Target
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Performance Since 11/5/2015
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Performance Since 2/25/2016
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“During my 17 years here at Quanta, I have been through several market down cycles and in each situation – whether the telecom meltdown in 2001 and 2002, or the financial crisis in 2008 to 2009, Quanta has emerged to stronger better company with improved competitive position within the industry. I expect the same result as we move through our current industry challenges.”
James F. O’Neil, CEO & President
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DCF Assumptions
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DCF Output