What hurricanes destroy, companies like Quanta Services (NYSE:PWR) help rebuild. Quanta and similar stocks garnered increased investor interest in the wake of Katrina and Rita, as the market expected downed power lines to mean uplifted profits from this utility infrastructure company. Quanta did see a storm-fueled boost, but it could gain even bigger benefits by helping electrical utilities upgrade their transmission equipment.
Looking at this quarter's performance, I've got to wonder whether analysts were asleep at their desks. The company handily exceeded the high revenue estimate, and earnings per share came in nearly 60% higher than expected. While storm repair work may have boosted revenue, the company also did a notable job of improving its margins; I think that shouldn't be overlooked.
Cash flow is another story, though. Operating and free cash flow were negative, both for the third quarter and year to date. Management blamed at least part of this on higher working capital needs due to the quarter's better-than-expected revenue. In addition, management predicted positive free cash flow for the full year.
While this quarter was better than expected, the real story for Quanta has yet to materialize: equipment upgrades from electric utilities around the country. Quanta's not the only one waiting. The bull theses for stocks like General Cable (NYSE:BGC), ABB (NYSE:ABB), Thomas & Betts (NYSE:TNB), and Cooper Industries (NYSE:CBE) all rely partly on the expectation that utilities will start spending big money on infrastructure projects.
Quanta is a tricky stock to evaluate. The price seems to suggest that a lot of people have already factored in the coming cyclical upswing for utility infrastructure. Of course, there's still the possibility that spending from the likes of Verizon (NYSE:VZ) or SBC (NYSE:SBC) will be higher than expected. What's more, once the growth from infrastructure projects becomes evident, it's possible that a fairly valued stock could get pushed into overvalued territory as investors pile on in search of growth.
For more on utility infrastructure ideas:
SBC is a Motley Fool Stock Advisor recommendation.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
