Push for Low-Carbon Economy Aids Quanta Amid Volatility

Quanta Services, Inc. PWR is capitalizing on strong demand for its services, driven by multi-year customer initiatives focused on modernizing and strengthening utility infrastructure, expanding renewable energy generation and transmission infrastructure, and shifting toward a low-carbon economy.

Quanta stock has gained 18% so far this year, outperforming the Zacks Engineering - R and D Services industry's 17.2% growth. This Zacks Rank #3 (Hold) stock is also expected to gain from prudent growth strategies and accretive acquisitions.

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Yet, the cyclical nature of the business, oil & gas volatility and regulatory issues are headwinds.

Nonetheless, the company's earnings per share estimate for 2024 and 2025 has moved north in the past 60 days to $8.44 and $9.56 per share from $8.42 and $9.52 per share. The estimated figure reflects a growth rate of 17.9% and 13.2% year over year, respectively.

The growth prospect is further solidified with a VGM Score of B, led by a Growth Score of A and a Momentum Score of A. The positive trend signifies bullish analysts' sentiments, robust fundamentals and prospects of an outperformance in the near term.

Let's take a look at the factors supporting the growth.

High Infrastructural Demand: Quanta is capitalizing on robust infrastructural demand by leading advancements in technology solutions across decarbonization. This includes carbon management, mitigation strategies, compliance consulting, and building essential infrastructure for carbon-neutral energy solutions. Positioned strategically, Quanta is set to harness major industry trends, playing a pivotal role in the energy transition and driving technological innovation forward. Key initiatives such as expanding electric vehicle charging networks and underground electrical installations are gaining momentum, driving Quanta's impressive growth trajectory.

Strategic Growth Approach: Quanta is executing a comprehensive growth strategy comprised of three key components. Firstly, the company prioritizes delivering projects promptly, surpassing customer expectations. Secondly, it aims to leverage its core business strengths to extend into complementary adjacent service lines. Thirdly, Quanta remains committed to exploring and integrating new service offerings. With its robust engineering and project management capabilities, the company is well-positioned to seize opportunities in a market landscape currently favoring an engineering, procurement, and construction model.

As a result, Quanta envisions delivering a 10% organic adjusted EPS compound annual growth rate (CAGR) and more than 15% adjusted EPS CAGR through 2026.

Solid Backlog Level: The company ended first-quarter 2024 with a total record backlog of $29.9 billion and a 12-month backlog of $16.64 billion. This compares favorably with first-quarter 2023 total backlog of $25.27 billion and a 12-month backlog of $14.63 billion. Quanta's optimism stems from healthy backlog levels, which are expected to grow further. This demonstrates the strength of its core operations.

Factors Hindering Growth

Business Cyclicality: The business exhibits a cyclical nature as the demand for Quanta's services is subject to fluctuations. Consequently, the company is particularly susceptible to declines in both government and private industrial expenditures. Throughout its history, fluctuations in commodity prices have affected not only the oil and gas sector but also regions where economic stability is significantly tied to commodity prices.

Challenges in Regulation: Quanta navigates a complex regulatory landscape characterized by stringent requirements for project development. Both the company and its clientele encounter obstacles related to product standards, safety protocols, and environmental safeguards.

Key Picks

Some better-ranked stocks in the Zacks Construction sector are:

Sterling Infrastructure, Inc. STRL currently has a Zacks Rank #2 (Buy). STRL delivered a trailing four-quarter earnings surprise of 22.3%, on average. Shares of STRL have gained 32.5% year to date (YTD).

The Zacks Consensus Estimate for STRL's 2024 EPS indicates growth of 18.6% from the previous year's reported levels.

Willdan Group, Inc. WLDN currently carries a Zacks Rank #2. WLDN delivered a trailing four-quarter earnings surprise of 88.9%, on average. Shares of WLDN have gained 36.6% YTD.

The Zacks Consensus Estimate for WLDN's 2024 sales and EPS indicates growth of 3.6% and 6.3%, respectively, from the previous year's reported levels.

Altair Engineering Inc. ALTR currently has a Zacks Rank #2. ALTR delivered a trailing four-quarter earnings surprise of 104.5%, on average. Shares of ALTR have gained 16.6% YTD.

The Zacks Consensus Estimate for ALTR's 2024 sales and EPS indicates growth of 7% and 9.7%, respectively, from the previous year's reported levels.

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