Shares of no-moat Quanta Services PWR have continued their outperformance year-to-date, rising 29% versus 12% for the S&P 500. Over a five-year timeframe, the company’s performance is even more impressive, rising at a 41% annualized pace compared with 11% for the S&P 500. We raise our fair value estimate to $132 per share from $125 after revisiting our long-term growth assumptions, but continue to see shares as overvalued (trading 40% above our fair value estimate).
Quanta shares have been on a meteoric rise since mid-2020, which we attribute to investors increasingly viewing Quanta as a way to invest in the energy transition theme. Quanta’s construction services are well-positioned to benefit from long-term secular growth in grid investment, renewable energy buildout, and related technologies. However, we think the market has increasingly lost sight of Quanta’s valuation.
Our out-of-consensus view on shares is not attributable to near-term views – our estimates through 2025 are in line or above consensus for revenue and adjusted EBITDA, per PitchBook. Rather we think the market is overestimating Quanta’s long-term growth rate and return on invested capital potential. We assume a long-term growth rate in operating income of high-single digits (8%) and return on new invested capital of 15% beyond our explicit five-year forecast. To justify the current share price, we think the market would have to imply low-double-digit operating income growth and a RONIC of 25%, which we view as too optimistic based on Quanta’s history and management guidance. For reference, Quanta’s historical returns on new investment have hovered in the low teens in recent years. On an enterprise value/EBITDA basis, our valuation implies a 12.4 times multiple (2023) versus 16 times at the current share price.
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