The United States is one of a number of countries worldwide that are shifting to a lower carbon energy mix. This is great news for a few companies that will be the beneficiaries of the modernization of the electric grid, and the drive for renewable energy generation more broadly.
One such company is a big player in the energy transition and a major beneficiary of the Inflation Reduction Act here in the U.S.
The Inflation Reduction Act is a slimmed-down version of the Biden Administration’s proposed Build Back Better legislation. It includes numerous investments in climate protection and clean energy production, as well as tax credits aimed at reducing carbon emissions.
And one company is set to benefit from this bill the most…
The company benefiting from the global energy transition is Quanta Services (PWR), which provides infrastructure solutions for the electric power, renewable energy, oil and gas, and communications industries.
Quanta divides its operations into the following segments: Electric Power Infrastructure Solutions (accounting for an estimated 60% of 2022 operating profit), Underground Utility and Infrastructure Solutions, and Renewable Energy Infrastructure Solutions.
Quanta is already a major player in the energy transition sector here in the U.S.: in July, the company was selected to be a lead provider in the rollout of a national electric vehicle charging network. The company will provide turnkey engineering, construction, and program management solutions for the project.
Not only does Quanta Services have a strong macroeconomic tailwind behind it, but it also has a very sharp management, which has made some extremely shrewd acquisitions. Here are just two examples…
In 2018, Quanta Services bought Northwest Lineman College, which delivers training programs for those in the utility and electricity sectors. Because the industry is short of skilled workers as the employee base ages, the college is a way Quanta can obtain skilled workers for the various infrastructure services it offers.
In October 2021, Quanta made a strategically sound move I really like, with the purchase of Blattner Holding Company, which now accounts for the majority of Quanta’s exposure to the renewable energy sector.
Blattner Energy, which sits under the holding company, is one of the leading utility-scale renewable energy infrastructure businesses in North America, providing engineering, procurement, and construction services (EPC) for solar, wind, and biomass projects. The company has a market share of approximately 30% for wind and 10% to 15% for solar, positioning it at the top of the renewable EPC industry.
This acquisition is already paying off the company: revenues from renewables has risen to 22% of total company revenues from just 13% in 2021. It’s also the fastest growing segment of Quanta’s business, with revenues growing in excess of 150% in the past year!
As the company’s CEO Duke Austin noted: “We are seeing growing demand for our renewable generation and infrastructure solutions in 2023 and beyond.”
This makes it highly probable that Quanta Services will meet its multi-year financial target of delivering 10% organic adjusted earnings per share compound annual growth through to 2026. In fact, I believe the rapid growth in demand in its renewable energy division will lead to Quanta exceeding this 10% target.
Quanta continues to outperform Wall Street’s expectations.
It is coming off the back of a very strong quarter and earnings upgrade.
The company generated record revenues in the second quarter: up 44% year on year, to exceed $4 billion for the first time. It also posted strong double-digit growth of adjusted EBITDA and adjusted earnings per share.
This was the ninth straight earnings beat, and the company now has a record 12-month backlog of orders.
In summary, Quanta Services is well-positioned to capitalize on evolving energy trends, and it’s clear that efforts to decarbonize the global economy will support demand for Quanta’s products and services.
Electricity demand is only rising around the world, and it will require continued investment in building new, and modernizing existing, electric infrastructure. Quanta has grown into the largest provider of transmission and distribution contracting services in the U.S., with approximately 15% market share. This market share looks set to grow even further in the years ahead.
I believe Quanta is a defensive investment thanks to its exposure to both electric transmission and distribution, as well as renewable energy. That will be a positive catalyst for earnings growth even if the broader stock market suffers from declining earnings per share.
That’s because the drivers of electric utility investment into upgrading the grid infrastructure (electricity transmission and distribution) are in place and should persist even in a weaker economic environment.
Quanta’s habit of reinvesting heavily into its business supports earnings growth and these earnings could see a further upgrade, thanks to positive momentum in the aforementioned renewables business, in particular.
Goldman Sachs energy equity research analyst Ati Modak said Quanta was still a “best-in-class equity expression” of companies with exposure to the megatrends in the electric grid modernization and renewable generation markets.
I totally agree, making Quanta a buy. The stock is up about 25% for the year, wildly outperforming the 20% or so decline for the S&P 500. Buy PWR anywhere in the $125 to $150 range.