If there's any one thing I especially enjoy about writing from my perch at The Motley Fool, it's that I'm not a reporter. I am a columnist, and as such I get the opportunity to express my opinions.
So here's another one -- I really want to like Quanta Services (NYSE:PWR).
Quanta is in the business of helping utilities, telcos, and cable companies build out their systems. With expertise in design, construction, and maintenance of transmission network equipment, Quanta helps these industries bring their services to the customer. Want to build new power lines? Call Quanta. Want to run cable to customers' homes? Call Quanta.
Looking into the future, Quanta should have a lot of business on its hands. Many utilities have actually cut spending on power distribution and transmission over the past few years, and some pundits have estimated that current spending may actually be as much as 20% below minimum maintenance levels. What's more, as I mentioned in an earlier piece, the existing U.S. power infrastructure is about 40 years old on average and barely capable of handling current demands.
Elsewhere, telecom companies are beginning to launch so-called "fiber to the premises" (FTTP) programs with the intention of offering high-capacity fiber to residential customers (for both telephone and broadband service). While only about 3% of local operators offer this service today (with less than 1 million customers nationwide), some believe that half of all homes will be connected by 2010.
So, what's the problem? Well, notice that both of the above paragraphs are talking about the future.
At present, companies still seem reluctant to spend on capital projects, and that means only so-so business conditions for Quanta. The company's revenue declined slightly in the fourth quarter (from a year ago) and adjusted net income was down by more than half. While the company did post over $105 million in free cash flow, more than half of that amount came from one-time items.
Although the company is seeing some pickup in activity, the build-out of FTTP from clients like Verizon (NYSE:VZ), SBC (NYSE:SBC), and CenturyTel (NYSE:CTL) is still erratic and unpredictable. On the utility side, everybody understands the need for upgrading the transmission infrastructure, but nobody is willing to pony up the money yet, and the absence of a comprehensive federal energy bill to help fund the upgrades isn't helping.
Though competitors including InfraSource (NYSE:IFS), Dycom (NYSE:DY), and MasTec (NYSE:MTZ) will all be looking for a piece of the pie, there should be plenty of business to go around. What's more, Quanta's ongoing involvement in maintenance and repair activities should give it a safety net of ongoing business while it awaits meaningful increases in new infrastructure orders.
Admittedly, investing is about the future, so today's sluggish state probably shouldn't deter investors with a true long-term focus. Quanta is the largest player in an industry where size matters, and valuation could prove low if new order activity does in fact pick up.
While I'm a little leery of pulling the trigger on Quanta before I see a meaningful increase in new orders, I also realize that I run the risk of seeing the stock shoot up before I can buy if those orders actually do come through. Nevertheless, while I like this company today, I'm going to wait until I love it before I consider adding it to my own portfolio.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned. Just because he says he wants to like Quanta, that doesn't mean you don't need to do your own due diligence.
