by Debra Fiakas CFA
Electric power companies need plenty of generating plants and
distribution works to bring electricity to our doors. Electric
utilities are very good at generating electricity and managing
relationships with the families and businesses that use the power,
but building all that infrastructure - drawing up plans,
hauling in materials and fastening girders - is not
necessarily a power company’s strong suit. Enter Quanta, Inc. (PWR:
NYSE) with a full menu of design, engineering and construction
services for electricity generation and distribution infrastructure.
Solving problems for electric utilities is good business for
Quanta. The company does leave all its eggs in one
basket. Quanta has developed expertise in building pipelines
and production facilities for the oil and gas industry as
well. The company earned $211.4 million in net income or $1.82
per share on $7.8 billion in total sales during the twelve months
ending September 2015. Even more significantly the company
generated $690.3 million in cash during the period.
It is not entirely a bed of roses for Quanta. Sales grew 22%
in 2014, but the growth rate has sputtered in recent months leaving
year-over-year comparisons flat in recent periods. While
Quanta managed to report earnings that beat the consensus estimate
by a penny in the quarter ending September 2015, the company missed
expectations by a wide margin in the previous three quarters.
The dozen or so analysts who follow Quanta closely have forecast a
‘down year’ in sales and have estimated only low single digit growth
next year. Quanta’s heyday in the infrastructure market may
have come and gone - at least for now.
Quanta may have the financial strength to withstand a difficult
period. At the end of September 2015, the company had $350.6
million in total debt, representing a 10.9 debt-to-equity
ratio. This compares to an average debt-to-equity ratio of
122.1 times for the general contracting industry. The balance
sheet has been aided by the sale earlier this year of Quanta’s fiber
optic licensing operation to Crown Castle International for $830
million after taxes.
Quanta now has $49.2 million in cash resources on the balance sheet
that can help tied the company over in a tough time. Even
under slow growth conditions Quanta is expected to remain profitable
and generate operating cash flow.
The company had been a bit stingy with its cash, foregoing a
dividend. However, leadership opened up the purse strings to
buy back 14.4 million shares of common stock for a total of $406
million in the first nine months of 2015. Then in August
2015, the stock repurchase plan was extended by $1.25 billion that
will be available through 2017.
PWR is trading at 11.4 times trailing earnings compared to an
average of 16.1 times trailing earnings for Quanta peers in the
construction industry. It appears PWR trading at a discount
because of expectations for slowing growth in the next year.
Investors in PWR get a good value with the promise of support from
the company’s stock repurchases over the next
Debra Fiakas is the Managing Director of Crystal Equity
Research, an alternative
research resource on small capitalization companies in selected
Neither the author of the Small Cap
Strategist web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein.
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Bottom line: Weak share reactions to upbeat
news from Trina, ReneSola and Ming Yang reflect investor
skepticism towards new energy stocks, as they face lingering
issues of overcapacity and phasing out of government subsidies.
A flurry of upbeat news is in the headlines today from 3 of
China’s largest new energy equipment makers, led by a return to
the profit column for solar panel maker ReneSola
after a year in the red. At the same time, wind power equipment
maker Ming Yang (NYSE: MY)
also announced its latest quarterly results that were quite
upbeat, and solar panel maker Trina (NYSE: TSL)
said it obtained a modest new financing from some major global
But contrary to expectation, investors greeted the string of
upbeat news by dumping shares of all 3 companies, reflecting a
high degree of skepticism in the market. Ming Yang led the
downward migration, with its shares slipping 3.7 percent after it
announced its latest quarterly results. Its shares now trade more
than 17 percent below the price for a previously announced buyout
bid to take the company private.
ReneSola shares didn’t fare much better, shedding 1.5 percent
after it announced its return to the black. Trina did the best of
the trio, with its shares only closing marginally lower after it
announced it received $90 million in new financing in two
different facilities from US banking giant Wells Fargo
and Britian’s Barclays Bank.
It’s worth noting that shares of all 3 companies are all well
above lows reached back in September when skepticism about the
sector’s future was highest. But a looming end to state subsidies
for new energy power plants in many major markets is creating
worries that these manufacturers could struggle if their products
can’t become more competitive with conventional energy sources.
Ming Yang highlighted that potential risk in its otherwise upbeat
quarterly report, which showed that its profit jumped nearly 30
percent in the third quarter to 91.5 million yuan ($14.4 million),
as revenue grew slightly to 1.7 billion yuan. (company announcement)
The improved profitability came partly on rising prices, even as
the company warned that China was likely to phase out wind power
subsidies over the next 5 years.
Next there was ReneSola, which reported its return to the profit
column in this year’s third quarter after a year of losses. Most
of China’s solar panel makers sunk into the loss column during a
major sector downturn 4 years ago, but the stronger ones have all
managed to return to profitability and stay there over the last 2
ReneSola returned to the profitable club with its announcement of
an $8.6 million net profit in the third quarter, reversing a $2.3
million loss in the previous quarter. But the return to the black
came as the company also posted a slight year-on-year decline in
quarterly revenue, reflecting its new focuses on building power
plants with less emphasis on boosting output.
Last there was Trina, which announced it has received credit
facilities worth $60 million and $30 million from Wells Fargo and
Barclays, respectively. (company announcement)
Neither sum is particularly large, but the more important signal
is that Trina could get such private sector funding at all. Until
recently, many of these panel makers were forced to look to
government sources for funding, and were largely shunned by
commercial banks due to their shaky financial position.
All that brings us back to the original issue of the latest
market sentiment towards these companies, as they search for
formulas to ensure their long term survival. There’s clearly a big
degree of skepticism towards the group, which is facing double
challenges of overcapacity and pressure from changing government
policies. Some of the stronger names like Canadian Solar
still look like good bets over the longer term, though we probably
still need to see some consolidation before the broader sector can
be said to be back on solid footing.
Doug Young has lived and worked in China for 15 years, much of
that as a journalist for Reuters writing about Chinese companies.
He currently lives in Shanghai where he teaches financial
journalism at Fudan University. He writes daily on his blog, Young´s
China Business Blog, commenting on the latest
developments at Chinese companies listed in the US, China and Hong
Kong. He is also author of a new book about the media in China, The
Line: How The Media Dictates Public Opinion in Modern China.
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