MasTec: Attractive Relative Valuation Balanced by Execution Risks; Shares Fairly Valued

We are initiating coverage of MasTec MTZ with a no-moat rating and $103 fair value estimate. We view shares as fairly valued.

MasTec is a specialty contractor serving the telecom, oil and gas midstream, renewable energy, electric utility, and related industries. MasTec’s end markets have historically been weighted toward telecom (wireless) and oil and gas pipeline, where it enjoys the leading market share positions. However, a slowdown in newbuild oil and gas pipeline activity (its largest profit contributor as of 2019) led the company to embark on diversifying its end markets. This has resulted in nearly $2 billion of acquisitions across 2021 and 2022 with a focus on energy transition opportunities (i.e.: renewables, electric grid).

While MasTec typically has leading market share across many of its end markets, we do not believe the company possesses a moat within the highly fragmented specialty construction industry. We find limited moats across our broader engineering and construction coverage list given intense competition, significant customer power, and relatively standardized nature of most projects. MasTec’s strongest competitive position, in our view, is in building long-haul oil and gas pipelines where few competitors can match its capabilities. However, we expect a reduced contribution from this segment moving forward.

Our financial forecast assumes mid- to-high-single-digit annual revenue growth based on robust spending by energy transition customers (clean energy and power delivery segments) coupled with continued communications growth, partially offset by a weak oil and gas segment outlook. We expect corporate adjusted EBITDA margins to just over 9% in 2027 from 8% in 2022, driven by margin expansion in the underperforming clean energy segment.