Artur Nichiporenko
Towards the end of 2021, I concluded that MasTec, Inc. (NYSE:MTZ) was marching forwards, as it has steadily grown the business with an interesting deal to create a $10 billion conglomerate. An improvement in the performance, reasonable leverage ratios, and a fair valuation all attracted my interest at the time.
The Base Case
MasTec is a critical infrastructure contractor which is quite diversified. The company generated $8 billion in sales from these services, which are heavily tied to communications, power delivery, clean energy, energy infrastructure, as well as a smaller reliance to the traditional oil & gas industry.
Communication was responsible for $2.6 billion in sales in 2021, mostly related to 5G, spectrum deployment, fiber, etc. Oil & gas was the second-largest segment in 2021 with $2.5 billion in sales, but is set to decline meaningfully in 2022. This segment involves pipelines, emission reduction initiatives, etc.
Clean energy & infrastructure was responsible for $1.9 billion in sales with power deliver at the time being the smallest unit with $1.0 billion in sales generated from grid investments, maintenance, and upgrades.
I looked at the stock in December of last year as the company was active in dealmaking last year. In May of last year, the company acquired utility specialty contractor INTREN in a $420 million deal set to add over half a billion in sales. This was followed by a $600 million deal for Henkels & McCoy, a private electrical power transmission and distribution utility firm.
The deal for Henkels was set to add $1.5 billion in sales, making it a substantial deal, actively growing the transmission business and overall EBITDA to more than a billion dollars amidst reasonable leverage ratios. With shares trading at $90 late last year, while earnings came in around $5.50 per share, MasTec valuations looked reasonable to me.
And Now?
Fast forwarding between the end of 2021, and today, we have seen shares fall from $90 to $68 at the moment of writing, as shares have been suffering in response to market conditions.
As it turned out, full year sales in 2021 were up 26% to $8.0 billion as adjusted EBITDA of $931 million was on the rise as well, yet margins were down 110 basis points to 11.7% of sales. Adjusted earnings came in at $5.58 per share, with GAAP earnings reported at $4.45 per share. A large part of this discrepancy comes from amortization charges, but if we strip out stock-based compensation expenses, earnings come in around $5.25 per share.
Sales growth slowed down dramatically in the final quarter, with EBITDA actually down quite a bit. The company guided for 2022 sales at around $9.95 billion, driven by the Henkels & McCoy purchase in a major way. The issue is that adjusted EBITDA was only set to rise 2% to $950 million, with adjusted earnings per share seen down to $5.32 per share. Project delays, higher start-up costs and inflation are real reasons for the margin pressure, clearly not a great sign.
These trends only worsened during the first quarter, as the company cut the full year sales guidance in a big way to $9.2 billion, with EBITDA set to fall further to $850-$875 million, and adjusted earnings per share seen around $4.36 per share. This is down about a dollar compared to the previous guidance, which was already soft to start with.
Despite the much slower operating performance, MasTec reached a deal to acquire Infrastructure and Energy Alternatives, Inc. (IEA) in a deal valued at $14 per share. IEA is mostly a service provider in renewable energy markets, which is set to generate some $2.4 billion in sales in 2022, equal to a quarter of MasTec.
The EBITDA contribution of IEA is seen at $145 million (at the midpoint of the guidance). The deal is valued at $1.1 billion, of which a quarter will be paid for in cash, with the remainder in shares. The deal is valued at just below 0.5 times sales and around 7.5 times EBITDA, although forward multiples look lower with growth seen in 2023.
Alongside the release of the second quarter earnings report, the company maintained the full year guidance, but it cut the EBITDA guidance to $750 million on the back of continued inflationary pressures and supply chain issues, with earnings cut further to a midpoint of just $3.09 per share.
Poor cash flow conversion made that net debt has risen to $2 billion which is a bit problematic given the big fall in EBITDA, as leverage ratios just above 1 time are rapidly rising towards 3 times. With the IEA deal involving a roughly $800 million cash component, pro forma net debt will jump to $2.8 billion, on a pro forma EBITDA number close to $900 million, for effectively a 3 times leverage ratio, or just above that number.
And Now?
Truth is that I am quite disappointed by MasTec here. Despite a solid secular positioning, sales are down a lot compared to the initial outlook despite inflationary pressures, and that reveals that some prospects are not coming through, or the business is losing market share. With pro forma EBITDA from over a billion dollars falling to three quarters of a billion, earnings are taking a major hit. This means that the equity value has fallen to $5 billion here, for a $7 billion enterprise valuation.
In that sense, even as current earnings are softer this year, the purchase of IEA looks reasonable in terms of the multiple and certainly in terms of the positioning. The truth is that management simply has something to prove right now, even as inflation, supply chain issues and labor availability are valid reasons for a softer performance.
The other issue is that of leverage, which is increasing rapidly, even ahead of the IEA deal. With earnings power down more than the shares, investors have to bet on a stabilization and recovery of margins, as management does not have a track record on its side in recent times. All of this means that I am not yet warming up to MasTec shares here, leaving me on the sidelines.
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