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Are Investor Hopes for a MasTec Rebound Premature?

By Dan Caplinger - Apr 29, 2016 at 10:02AM

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The specialty construction company's stock is climbing, but earnings could lag behind.


Image source: MasTec.

For infrastructure construction company MasTec (MTZ -1.36%), the plunge in crude oil prices created a huge disruption to an essential part of its core business. Recently, though, the energy industry appears to have hit bottom, and coming into Thursday's first-quarter financial report, MasTec investors now think that the company will start to see better times ahead. Yet skeptics wonder if bullish shareholders are getting ahead of themselves, with many still expecting MasTec to lose money this quarter. Let's take an early look at what MasTec is probably going to tell its investors this quarter and whether signs of a turnaround are telling the truth right now.

Stats on MasTec

Expected EPS Growth

(129%)

Expected Revenue Growth

(5.1%)

Forward Earnings Multiple

12.9

Expected 5-Year Annualized Growth Rate

4.3%

Data source: Yahoo! Finance.

Can MasTec earnings recover?
In recent months, analysts have gotten a lot more nervous about how they think MasTec earnings are likely to fare. They've gone from expecting a $0.13 per share profit to calling for a $0.02 per share loss in the first quarter, and they've also reined in their expectations for the second quarter as well. Yet the stock has soared, climbing almost 60% since late January.

MasTec's fourth-quarter report was ugly, although it wasn't as bad as many people had expected it to be. Sales fell 17% from the year-ago quarter, and net income from continuing operations fell by nearly half. Although the oil and gas segment predictably posted substantial declines, the electrical transmission business was actually the hardest hit by the tough times, seeing revenue cut in half. Yet CEO Jose Mas pointed to record backlogs as a sign that the company is well-positioned to rebound when the energy market starts to recover, and favorable guidance for the 2016 year suggested that even if MasTec got off to a slow start for the year, accelerating growth could spur a full-blown recovery.

Yet one thing that many people forget about MasTec is that it isn't just about construction and energy. The company has plenty of exposure to high-growth areas of the economy. For instance, MasTec plays an important role in providing communications infrastructure to the mobile carrier industry. In its quarterly conference call, MasTec highlighted the opportunity in wireless infrastructure, pointing to moves from carriers to increase capital expenditures in an effort to build out their networks to compete more effectively. With expansion expected at exponential rates, MasTec will have plenty of demand in the future for its services. Moreover, efforts like the FCC's Connect America fund could spur more building in the wireless network grid, giving MasTec even more exposure in helping to build out 4G and 5G networks. That has been an important part of how some MasTec competitors have held their own in the tough energy market, because focusing on telecom has been a more reliable business model.

The other thing that investors need to watch out for is whether some of the weakness in MasTec's results last quarter was temporary. For instance, in explaining the shortfall in the Electrical Transmission business, MasTec said that delayed starts on some projects held back its results, along with some underperforming project execution. If those delayed starts actually took place during the most recent quarter, then the results could be that much higher for bullish investors. To its credit, MasTec is looking out as far as 2019 for some of its projects, and its forward-thinking approach should give investors confidence in the long-range vision for the company.

In the MasTec report, investors need to focus on long-term prospects for the company. Weakness in near-term results could throw the stock for a temporary loop, but if MasTec is as well-positioned to succeed over the next few years, then a pullback could be a nice buying opportunity -- especially if energy has in fact hit bottom.

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Stocks Mentioned

MasTec, Inc. Stock Quote
MasTec, Inc.
MTZ
$78.52 (-1.36%) $-1.08

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