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WIKI ANALYSIS
Quanta Services (PWR) installs and repairs infrastructure for the natural gas, electric, telecommunications, and cable industries. Its primary business is installing power lines and power distribution networks for companies that provide power, like gas and electric utilities. In 2007, Quanta completed 650 electric-related contracts (out of their total 1301) for over $1.43 billion dollars or 57% of their gross revenue. [1]
From 2006 to the present, global demand for power has boosted demand for Quanta's work. The aging U.S. and Canadian power grid consisting of more than 200,000 miles of high-voltage lines now requires significant maintenance and expansion to handle the nation’s growing power needs. North American Electric Reliability Council (NERC) industry professionals currently recommend a complete electric infrastructural overhaul by 2014.[2] In addition, in conjunction with the 20% US Population growth since 1990, energy consumption has increased by a comparable 18%. [3] Increasing demand for electricity has resulted in increased spending on transmission and distribution systems. Quanta has been and continues to be a significant beneficiary of this global energy need. Quanta has already secured 730 contracts for 2008 (worth $1.82 billion) and 800 for 2010 (worth $2.1 billion) in the electric works segment (approx. 18% of market share); the company possess accounts receivable worth $140 million for 2008 from such investor-owned utilities to prevent network shortages. [4]
Company Overview
Business Segments
Quanta Services operates in four segments: electric power, telecommunications, natural gas, and ancillary services. Between 2003-2007, PWR has earned an increasing percentage of its revenue from the electric power industry. In 2003, electric power work only represented 20% of PWR’s gross revenue. In 2004, this percentage ballooned to 35% and by 2007, electric power work made up over 57% of the company’s revenues. [7]
- Electric Power Work (57% of 2007 revenue): In the electric power work segment, PWR installs and maintains power transmission lines and distribution networks.[8]
- Telecommunications (17% of 2007 revenue): In the telecommunications segment, PWR installs fiber optic and DSL networks for data transmission, builds wireless network towers, and leases telecom infrastructure through its dark fiber business.[9]
- Dark fiber refers to the leasing of as-yet-unused infrastructure; because of the substantial overhead required to install fiber optic lines, it makes sense to install more fiber in order to account for future expansion.[10]
- Natural Gas (14% of 2007 revenue): In the natural gas segment, PWR installs gas transmission and distribution systems and provides pipeline testing services.[11]
- Ancillary Services (12% of 2007 revenue): This segment provides specialized services, such as installing traffic lights for local governments and building wiring and automation systems for business customers.[12]
Business Financials
Finances
- Revenue has grown at an uncompounded average rate of 10.3% per year since 2002.[13]
- Net income reached its lowest point in 2002, as a result of several special, one-time costs. Since 2002, Quanta's net income has grown on average by 24.3% per year, uncompounded.
- Quanta's cost of goods sold (COGS) and selling, general, and administrative expenses (SG&A) have both risen steadily since 2002, though not quickly enough to outpace revenue growth. Between 2002 and 2007, COGS grew at an average uncompounded rate of 9.9% year-over-year,[14] and SG&A expenses grew by about 6.2% year-over-year.[15] Additionally, special or extraordinary expenses (mostly one-time charges associated with either renovating existing infrastructure or general business expansion) have been recurring items on Quanta's income statement, though these charges have declined from their peak in 2002.[16]
| Annual income data, in millions[17] | 2003 | 2004 | 2005 | 2006 | 2007 | |
|---|---|---|---|---|---|---|
| Total Revenue | $1,625 | $1,609 | $1,842 | $2,110 | $2,656 | |
| Cost of Services | $1,428 | $1,429 | $1,588 | $1,797 | $2,227 | |
| Gross Profit | $197 | $180 | $255 | $313 | $429 | |
| Net Income | ($33.9) | ($9.5) | $29.2 | $16.2 | $133.1 | |
Acquisition
In August 2007, Quanta acquired Infrasource Services Inc., another specialized infrastructure services company, for $1.2 billion; the Infrasource acquisition greatly increased Quanta Service’s existing service areas and added an entire dark fiber leasing business.[18] As a result of the acquisition, Quanta gained Infrasource's considerable presence in the north-central and northeastern U.S. and Canada, markets that Quanta had never entered before.[19] Quanta also became the largest specialized power work company in the world. Pre 2007, Quanta never possessed electrical infrastructure in Canada. However, following the 2007 merger with Infrasource, Quanta acquired Infrasource's Canadian possesions. Book entries for Candian revenue from Quanta began in the first quarter of 2008.
Trends and Forces
Aging U.S. and Canadian Infrastructure Will Need Renovation
In 2007, Quanta Services spent over $2 million lobbying for contracts related to infrastructural renovation and construction in the United States.[22] That same year Quanta entered into 650 Electric Work contracts comprising 16.7% of Electric Work Market share in the United States, earning $1.43 billion.[23] Quanta has already secured 730 contracts for 2008 (worth $1.82 billion) and 800 for 2009 (worth $2.1 billion) in the US Electric Works segment; cumulative contract quantity and value represent approximate 18% of projected US Electric Work market share. [24]
The U.S. and Canadian electric power grid consists of more than 200,000 miles of high-voltage lines delivering electricity to over 300 million people.[25] The infrastructure is aging and requires significant maintenance and expansion to handle the nation's growing power needs. North American Electric Reliability Council (NERC) industry professionals estimate a complete electric infrastructural overhaul in the next 5-10 years in order to respond to the wavering reliability of the transmission system. In addition, NERC issued a report forecasting a 135,000 peak-megawatt consumption (ie consumption during summer) by 2017, a 17.7% increase over the next ten years. [26]. Lastly, the failure rate for an electricity transformer rises sharply 30 years after installation; the US' last major investment in transformers occurred in 1974, to accommodate a peak of 185 giga-voltage amperes. As a result, power companies throughout the United States are beginning to replace aging transformer units, which benefits PWR's Electric Works division.[27]5
Demand Spike In Energy as Result of 20% Domestic Population Growth
According to the 2008 Annual Energy Outlook by the U.S. Department of Energy’s Energy Information Administration (EIA), the U.S. population has increased by about 20% since 1990, with energy consumption increasing by a comparable 18%.[28]In addition, The EIA projects that U.S. electricity sales from producers to consumers will increase to 5168 billion kilowatt-hours in 2030, up 41% from 3,660 billion kilowatt-hours in 2005.[29] Increasing demand for electricity has resulted in increased spending on transmission and distribution systems, as shown by increased investment spending by investor-owned utilities; as these utilities renovate their infrastructure to meet demand, specialized infrastructure companies such as Quanta reap the benefits. According to an Edison Electric Institute (EEI) report published in January 2008, investor-owned utilities spent a total of $6.9 billion on their transmission systems in 2006 and plan to invest an additional $38.1 billion in their transmission systems from 2007 to 2010 (or approximately $10 billion per year).[30] In 2006, Quanta services received $40 million from investor-owned utilities to boost infrastructure capacity; in 2007, it received $100 million.[31] Given that the 2006 transmission investments from investor-owned utilities totaled $0.5 billion, considerable new revenue potential has been manifesting itself to Quanta. [32]
U.S Economic Cycles Disproportionately Impact PWR's Revenue
Between 2002 and 2004, telecommunications markets turned for the worse as many constituent companies (ex. 360Networks) suffered bankruptcy (following the 2002 Dot Com recession), resulting in devaluation of other organization’s equity securities as well as downward pricing pressures. Quanta Services, a longstanding infrastructure arm for many telecom companies, felt the repercussions of such bankruptcies as distressed enterprises delayed or canceled projects and reduced capital spending. Between January 2002 and January 2004, Quanta’s telecommunication customers cumulatively defaulted on 70 of Quanta’s 200 contracts costing PWR nearly $80 million ($70 million in revenue and $10 in administrative expenses) or 33% of their revenue forecast (compared to the industry decline of 28%). Quanta’s telecommunication infrastructure segment as a whole suffered more than the telecommunication industry over the Jan 2002-Jan 2004 time horizon largely because of telecommunication company’s inability to honor contracts with colossal overhead during times of despair. In this time of instability, telecommunication companies such as Comcast and Broadband Connect grew uncertain regarding their projected user-growth estimates. As a result of this uneasiness, these companies reneged on many of their contracts with Quanta (11/18 for Comcast, 8/12 for Broadband Connect) out of fear of under-usage of the planned infrastructure. [33]
Competition and Market Share
Quanta Services competes with other specialized construction firms to acquire contracts from electric, telecommunications, and natural gas service providers.
| Company | 2007 Revenue (millions USD) | Net Margin (%) | New Contracts | Electric Work Market Share (2007)[34] |
| Quanta Services (PWR) | $2,656 [35] | 5 [36] | 1,301 [37] | 16.7% |
| Emcor Group (EME) | $5,927.2 [38] | 2.1 [39] | 4,845 [40] | 37.3% |
| Integrated Electrical Services (IESC) | $892.8 [41] | 0.1 [42] | 934 [43] | 5.6% |
| Mastec. Corp | $1,037.8[44] | 0.6 [45] | 988 [46] | 6.5% |
| URS Corp. | $5,383.0 [47] | 2.5 [48] | 1,022[49] | 33.9% |
- Emcor Group (EME) specializes in lighting systems, data communication systems, ventilation systems, fire protection systems, and water treatment systems.[50]
- Integrated Electrical Services (IESC) is a U.S. provider of electrical contract services. IESC serves commercial, industrial, and residential markets.[51]
- Mastec. Corp specializes in the installation and maintenance of communications and utility infrastructure in the United States.[52]
- URS Corp., unlike Quanta, does most of its business through contracts with the U.S. federal government.[53]
References
- ↑ PWR 2007 10-K, Item 1: Business, page 3
- ↑ PWR 2007 10-K, Item 1: Business, page 4
- ↑ PWR 2007 10-K, Item 1: Business, page 4
- ↑ PWR S&P Compustat Report, Page 3, July 6 2008
- ↑ PWR 2007 10-K, Item 1: Business, page 3
- ↑ PWR Google Finance July 4, 2008
- ↑ PWR 2007 10-K, Item 1: Business, page 3
- ↑ PWR 2007 10-K, Item 1: Business, page 6
- ↑ PWR 2007 10-K, Item 1: Business, page 6
- ↑ PWR 2007 10-K, Item 1: Business, page 3
- ↑ PWR 2007 10-K, Item 1: Business, page 6
- ↑ PWR 2007 10-K, Item 1: Business, page 6
- ↑ PWR S&P Compustat Report, Page 3, July 4 2008
- ↑ PWR S&P Compustat Report, Page 3, July 4 2008
- ↑ PWR S&P Compustat Report, July 4 2008
- ↑ PWR S&P Compustat Report, Page 3, July 4 2008
- ↑ PWR 2007 10-K, Selected Financial Data, pg. 31
- ↑ PWR 2007 10-K, Item 1: Business, page 2
- ↑ PWR 2007 10-K, Item 1: Business, page 3
- ↑ PWR 2007 10-K, Item 1: Business, page 6
- ↑ PWR Google Finance July 4, 2008
- ↑ PWR S&P Compustat Report, Page 3, July 4 2008
- ↑ PWR S&P Compustat Report, Page 3, July 4 2008
- ↑ PWR 2007 10-K, Item 1: Business, page 4
- ↑ PWR 2007 10-K, Item 1: Business, page 4
- ↑ PWR 2007 10-K, Item 1: Business, page 4
- ↑ SPX Annual Guidance Meeting 2008 pages 35-37, Source: Hartford Steam Boiler
- ↑ PWR 2007 10-K, Item 1: Business (Industry Overview), page 4
- ↑ PWR 2007 10-K, Item 1: Business (Industry Overview), page 4
- ↑ PWR 2007 10-K, Item 1: Business, page 4
- ↑ PWR S&P Compustat Report, Page 7: Analysis, July 6 2008
- ↑ PWR S&P Compustat Report, Page 2: Industry Benchmarks, July 6 2008
- ↑ PWR 2007 10-K, Item 1A: Risk Factors, page 15
- ↑ EME S&P Compustat Report, Page 3, July 6, 2008
- ↑ PWR Google Finance, Juy 4, 2008
- ↑ PWR Reuters, July 4 2008
- ↑ PWR Reuters, July 4, 2008
- ↑ EME Google Finance, July 4, 2008
- ↑ EME Reuters, July 4, 2008
- ↑ EME Reuters, July 4, 2008
- ↑ IESC Google Finance, July 4 2008
- ↑ IESC Reuters, July 4, 2008
- ↑ IESC Reuters, July 4, 2008
- ↑ MTZ Google Finance, July 4,2008
- ↑ MTZ Reuters, July 4, 2008
- ↑ MTZ Reuters, July 4, 2008
- ↑ URS Google Finance, July 4,2008
- ↑ URS Reuters, July 4, 2008
- ↑ URS Reuters, July 4, 2008
- ↑ EME Google Finance, July 4,2008
- ↑ IESC Google Finance, July 4,2008
- ↑ MTZ Google Finance, July 4,2008
- ↑ URS Google Finance, July 4,2008
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