When last I spoke of telecom and utility contractor Quanta Services (NYSE:PWR), I said that this was the sort of story that I really wanted to like, but I didn't want to buy ahead of an actual turn in the business. Well, two quarters have gone by, and it's time for a little checkup.
Results for the second quarter would certainly suggest that business has gotten at least a little better. Revenue for the period was up about 13%, and operating margins improved from the year-ago level. While the 2.3% operating margin reported in this quarter is modest, the number is at least heading in the right direction. With this improvement in operating results and an improvement in net interest expense, the company reversed a year-ago net loss.
As investors familiar with the company would likely have suspected, utility business made up the bulk of revenue for the quarter (about 63%) and showed low-teens growth over last year. Telecom and cable was sluggish, as the company had previously guided, and up about 5%, while "other" revenue grew 21%.
But as we've said before at The Motley Fool, investing is much more about the future than the past. As such, the future of Quanta's business still looks promising, but there's a ways to go on the "how much" and "when" parts of the equation.
The cable business is still pretty sluggish, but telecom broadband activity seems to be picking up. Verizon (NYSE:VZ) has this company at work in several states already, and SBC (NYSE:SBC) seems about to get into the game in earnest as well. While rival Dycom (NYSE:DY) might be a purer play on this subsegment, I wouldn't totally ignore Quanta.
Quanta should also get a boost from the ballyhooed federal energy bill. Not only does the bill contain a provision to accelerate depreciation for transmission equipment but also it allows for the establishment of reliability standards -- something that could force utilities to upgrade their equipment. Last but not least, utilities are doing better financially these days, and that may in turn lead them to finally spend the money to upgrade transmission and distribution equipment.
I still think that Quanta is a story on the come. Companies that sell into the utility industry, such as ABB (NYSE:ABB), Thomas & Betts (NYSE:TNB), and Cooper Industries (NYSE:CBE), are reporting better business conditions, and that could presage better business for Quanta down the road.
How far down the road? I just don't know. At this point, Quanta still looks like a situation where the company is more interesting than the stock -- at least on a strict valuation basis. What's more, investors should be aware of $270 million in debt that can convert to equity around $11 a share. All the same, this stock might still be interesting for investors desiring a play on the utility infrastructure replacement cycle.
For more empowering takes:
- A Healthier Glow for Nuclear Power?
- Building for the Future
- I Want to Like Quanta
- ABB's Long Road Back
SBC is a Motley Fool Stock Advisor recommendation.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
