Over the past decade, North America has experienced strong growth in the energy and telecommunications markets. We expect investment in these industries to outpace most other sectors, driven by the rise of new drilling technologies and the emergence of the mobile phone. Consequently, on the whole, we believe stocks in these sectors ought to perform well over the next decade. In particular, companies engaged in the construction of certain infrastructure projects should experience some solid share-net gains in the coming years.
MasTec (MTZ) is an engineering & construction company that operates throughout North America. The company primarily designs and builds infrastructure for the energy, utility, and communications sectors. Past projects have included natural gas and petroleum pipelines, wireless and satellite communications, wind and solar farms, and electrical utility transmission and distribution projects.
The company reports its revenue under five segments: Communications, Electrical Transmission, Oil & Gas, Power Generation and Industrial, and Other. The Communications segment has historically accounted for roughly 50%-55% of its top line. Oil & gas jobs have contributed 25% to revenues over the last three years. Finally, the electrical transmissions business has also seen rapid gains, growing from $67 million in annual sales in 2010 to $312 million last year.
The oil & gas market probably represents the greatest opportunity for MasTec. MTZ has good exposure to the construction of long-haul pipelines, which are expected to be in high demand by the industry going forward. Indeed, there are still bottlenecks in a number of shale plays in the U.S. and western Canada. MasTec has strong relationships with several leading pipeline operators that should drive a majority of new project awards. Additionally, we believe the Keystone XL pipeline, assuming it is eventually approved, could be a nice catalyst for this business.
The Communications segment is largely driven by MasTec’s two biggest customers, DIRECTV (DTV) and AT&T (T – Free AT&T Stock Report). The company primarily constructs and performs maintenance work on wireless towers and digs trenches to install fiber optic cable. We believe the rise of mobile networks will continue to increase the demand for projects that look to upgrade high-speed internet and broadband services. Too, AT&T will most likely continue to enhance its 4G network, given the intense competition in this market.
MasTec has worked on diversifying its customer base over the past couple years. Historically, the company had been heavily reliant on business from AT&T and DIRECTV. In any given quarter, MTZ still derives between 20% and 30% of its sales from these industry leaders. However, the company has been able to pick up a number of key partners in the energy and utility sectors. In the most recent quarter, the company received 12% of its revenue from pipeline operator, Enbridge (ENB). Additionally, the E&C enterprise has partnerships with TransCanada (TRP) and Chesapeake Midstream partners. In the Utility space, MasTec has relationships with Duke Energy (DUK) and Dominion Virginia Power, to name a few.
MasTec has been quite active on the M&A front over the past couple years. It acquired Canada-based construction company, Big Country Energy Services, for $103 million earlier in 2013. Big Country constructs pipelines and performs other related services in the oil & gas market. The company’s largest customer is Shell, and primarily operates in western Canada. We believe this acquisition is noteworthy, given the strong demand we foresee for pipeline development in this region.
We expect the company’s bottom-line growth to accelerate in the next two years, driven by the significant infrastructure investments in the energy and communication sectors. Indeed, we look for share net to rise 20% and 22% for 2013 and 2014, respectively. Consequently, we believe the stock is suitable for investors with a near-to-intermediate time horizon.
Subscribers interested in this engineering and construction company are advised to consult Value Line’s quarterly reports for MasTec, as well as any supplemental reports as important news items arise.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.