MasTec: Struggles After The Acquisition Spree

In October of last year, I noted that shares of MasTec (NYSE:MTZ) left me far from being electrified. This came after a strong 2021, as multiple bolt-on deals were set to make the business surpass the $10 billion revenue mark in 2022.

That has not materialized amidst supply chain issues and project delays, with lower sales and margins weighing on earnings power, even resulting in very modest leverage concerns. Amidst this background, I believed that a pullback in the share price was very reasonable, after the company just underwent an acquisition spree, not making me an automatic buyer of the dip.

While the original 2023 guidance was solid, the company again sees some headwinds here, making me believe that the focus should be on execution and margins rather than growth.

Critical Infrastructure Contractor

MasTec is a contractor which makes critical infrastructure tied to communications, power delivery, clean energy, energy infrastructure as well as a small reliance on the traditional oil & gas industry.

The company generated $8 billion in sales in 2021, with the communication segment being the largest, with $2.6 billion in sales, related to 5G, spectrum deployment and fiber. Oil & gas, with a $2.5 billion sales contribution, involved services on pipelines, emission reductions and other initiatives, a business which saw some areas of decline.

These activities were complemented by a $1.9 billion clean energy & infrastructure business and a $1 billion power delivery business related to grid investments, alike. To further grow the business (and in promising areas), the company acquired INTREN in a $420 million deal in 2021 and announced a $600 million purchase of Henkels & McCoy set to grow the business to a $10 billion revenue base.

Between early 2022 and October of the year, shares fell from $90 to $70, as the business saw some pressure. 2021 revenues rose by 26% to $8.0 billion as EBITDA improved to $931 million, with margins down 110 basis points towards 11.7% of sales, with adjusted earnings reported at $5.58 per share.

The company guided for 2022 sales to rise to $9.95 billion, but EBITDA was only set to rise by 2% to $950 million, with EBITDA progress being limited due to project delays and inflationary pressures. Adjusted earnings were actually seen down to $5.32 per share, due to incremental interest costs.

The company cut the guidance meaningfully following the first quarter release: at the time, seeing full sales at just $9.2 billion with EBITDA seen at just $850-$875 million. Despite the softer operating conditions, the company reached a deal to acquire Infrastructure and Energy Alternatives, a deal set to add $2.4 billion in sales. Alongside the deal, the company cut the EBITDA guidance further to $750 million, as leverage ratios were quickly on the rise.

Pro forma net debt of $2.8 billion post the IEA deal made that leverage ratios were seen around 3 times, with IEA set to add $150 million in EBITDA to the business, for a $900 million EBITDA number.

Tough Times

Shares of MasTec rallied from the $70 mark in October to the $100 mark in February, as shares rose to $120 in recent trading weeks, before selling off to $95 per share in the wake of the release of the second quarter earnings results.

In February, MasTec announced 2022 sales of $9.8 billion, on which EBITDA was reported at $781 million, slightly ahead of the lowered guidance during the year. With the addition of the multiple deals in recent times, the company called for 2023 sales around $13.0 billion, with EBITDA seen between $1.10 and $1.15 billion, with adjusted earnings seen between $4.64 and $4.91 per share, as that latter number came in at $3.05 per share in 2022.

The company hiked the full year sales guidance to $13.0-$13.2 billion following the release of the first quarter results, with EBITDA still seen between $1.10 and $1.15 billion as higher interest expense made that earnings per share were only seen between $4.35 and $4.85 per share.

The company trimmed the guidance again following the second quarter earnings release, with sales now seen between $12.7 and $13.0 billion, with EBITDA seen between $1.05 and $1.10 billion, and with adjusted earnings now seen between $3.75 and $4.19 per share. This is somewhat worrying as net debt ticked up from $2.8 billion to $3.2 billion, for a 3 times leverage ratio.

And Now?

It feels as if the company has been a bit too active to pursue deals, as multiple sizeable deals have been made in recent times. It is clear that they do not work out in their entirety by now. This makes that softer performance, likely due to a big integration task and choppy market conditions, creates concerns as well as the fact that net debt has ticked up quite a bit here.

This makes it hard to get upbeat on the current performance, with a 21 times adjusted earnings multiple and 3 times leverage ratio being quite demanding, as margins have been coming down over time despite the scale gains achieved over time, as the company has tripled sales to $13 billion over the past decade.

The big if is the company can return to historical EBITDA margins of around 10%, or even low double-digit percentages, with margins now reported around 6-7%, despite the sound positioning to some long-term secular growth trends. There is potential for margins to recover, however, as projects of customers are delayed due to uncertainty on the Inflation Reduction Act. This means that if these projects finally start, the business could see a few very strong quarters and or even years.

Hence, I am again disappointed with MasTec, and while the current valuation is not cheap, the long-term positioning is improving. If margins can recover a few points, earnings per share could increase to high single digit earnings per share over time, revealing great long-term upside.

As this requires some real execution and believe in such execution, a speculative long-term position might be warranted on dips here, although that increased focus on execution would be greatly welcomed now as some emerging signs are needed for me to get involved.

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