MasTec Q3 Earnings in Line, Shares Up on Improved Outlook - Analyst Blog

MasTec, Inc. (MTZ) reported third-quarter 2014 adjusted earnings (excluding one-time items barring non-cash stock compensation expense) of 53 cents per share on Oct 30, down from 59 cents earned in the year-ago quarter. Earnings were in line with the Zacks Consensus Estimate but below management's guidance of 56 cents. However, shares of MasTec rose over 8% and closed at $28.64 on the next day owing to upbeat 2014 guidance.
 
Including one-time items, earnings fell 10% to 53 cents per share from 59 cents in the prior-year quarter.

Operational Update

MasTec's net sales increased 3.2% year on year to $1.31 billion in the quarter, beating the Zacks Consensus Estimate of $1.27 billion. However, revenues came just above the lower end of management's guidance range of $1.30—$1.35 billion.

Revenues at the Power Generation and Industrial segment increased 34.4% to $114 million. Sales in Electrical Transmission increased 11.6% year over year to $132.6 million. Revenues in the Oil and Gas segment were up 7.4% to $557 million, offset by a 7% decrease in the Communications segment, due to previously announced expected lower wireless project revenue.

Cost of sales in the quarter went up 3.9% year over year to $1.12 billion. Gross profit declined to $187 million from $188 million the year-ago quarter. Gross margin contracted 50 basis points to 14.3% in the quarter.
 
General and administrative expenses increased 1.5% year over year to $60 million. Operating profit declined 2% to $126.7 million in the quarter from $129.3 million in the prior-year quarter. Consequently, operating margin decreased 50 basis points (bps) year over year to 9.7%. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $132 million as against $135 million in the prior-year quarter.
 
Financial Details
 
As of Sep 30, 2014, MasTec reported cash and cash equivalents of $7.1 million versus $2.8 million as of Sep 30, 2013. Cash flow from operating activities was $81 million in the nine-month period ended Sep 30, 2014, compared with $129 million in the prior-year period.
 
Long-term debt amounted to $1.09 billion as of Sep 30, 2014, compared with $765 million as of Dec 31, 2013. The debt-to-capitalization ratio rose to 49% as of Sep 30, 2014, from 43% as of Dec 31, 2013.

Guidance

For 2014, MasTec raised revenue guidance to $4.6 billion from the previous range of $4.4 to $4.5 billion. Adjusted EBITDA was projected at $425 million for the full year. The company also revised adjusted earnings outlook to $1.55 per share from the $1.55 to $1.58 band. Due to the seasonality of business and timing of project closeouts in 2014, MasTec hopes to generate significant cash flow from operations in the fourth quarter and expects 2014 results to exceed 2013 cash flow levels of approximately $200 million. The company expects capital expenditure of $80 million to $85 million in 2014

For the fourth quarter, cash flow will be significant due to the initiation of working capital reduction initiatives at the recently acquired WesTower subsidiary. However, the company expects wireless project activity to slow further in the fourth quarter.

MasTec also expects to incur acquisition integration costs associated with the recent acquisition of WesTower of approximate $20 million over the next several quarters.

Due to the recent acquisition of WesTower, the company is now providing preliminary financial performance estimates for 2015. MasTec estimates that 2015 revenue will increase 13—17% over expected 2014 revenue to $5.2 to $5.4 billion. The company also expects that continuing operations adjusted EBITDA margin to be approximately 10% of revenue and continuing operations adjusted diluted earnings per share to be in the range of $2.00 to $2.15.

Our Take
 
MasTec's recent acquisition of WesTower will help it to expand in the wireless market. The company will also benefit from strong bidding opportunities in Oil & Gas, Electrical Transmission and 1-gigabit fiber expansion. However, unexpected delays in wireless project spending remain a headwind in the near future.

Coral Gables, FL-based MasTec is a leading infrastructure construction company that operates primarily in North America and caters to a range of industries. Its services include engineering, building, installation, maintenance and upgrade of energy, utility and communications infrastructure as well as industrial infrastructure.
 
At present, MasTec has a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering in the construction sector  include Trex Co. Inc. (TREX), The Sherwin-Williams Company (SHW) and NVR, Inc. (NVR). All of these carry a Zacks Rank #2 (Buy).