Quanta Services Inc (PWR, Financial) experienced a 3.63% loss on the day's trading and a 0.37% loss over the past three months. Despite this, the company's Earnings Per Share (EPS) stands at 3.92. This raises the question: Is the stock modestly overvalued? This article aims to provide an in-depth analysis of Quanta Services' valuation to help investors make informed decisions. Let's delve into the details.
Quanta Services is a leading provider of specialty contracting services, delivering comprehensive infrastructure solutions for various industries in the United States, Canada, and Australia. The company reports its results under three reportable segments: electric power, renewables infrastructure, and underground utility and infrastructure. In 2021, Quanta acquired Blattner, a provider of comprehensive engineering, procurement, and construction solutions to customers in the renewable energy industry. Currently, Quanta Services (PWR, Financial) is trading at $188.17, which is higher than its fair value (GF Value) of $166.28.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It's calculated based on historical multiples, an internal adjustment factor based on the company's past returns and growth, and future business performance estimates. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded.
According to GuruFocus' valuation method, Quanta Services (PWR, Financial) appears to be modestly overvalued. If the stock price is significantly above the GF Value Line, it's likely overvalued and may yield poor future returns. Conversely, if it's significantly below the GF Value Line, the stock may be undervalued and could potentially offer higher future returns.
Given that Quanta Services is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.Link: These companies may deliever higher future returns at reduced risk.
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding to buy shares. Quanta Services has a cash-to-debt ratio of 0.08, which ranks worse than 90.09% of 1605 companies in the Construction industry. Based on this, GuruFocus ranks Quanta Services' financial strength as 6 out of 10, indicating a fair balance sheet.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is generally less risky. Quanta Services has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $18.40 billion and Earnings Per Share (EPS) of $3.92. Its operating margin is 5.03%, which ranks better than 51.5% of 1631 companies in the Construction industry. Overall, the profitability of Quanta Services is ranked 8 out of 10, indicating strong profitability.
Growth is one of the most important factors in the valuation of a company. If a company's business is growing, it usually creates value for its shareholders, especially if the growth is profitable. Quanta Services' 3-year average revenue growth rate is better than 74.84% of 1554 companies in the Construction industry. Its 3-year average EBITDA growth rate is 16.9%, which ranks better than 71.86% of 1322 companies in the Construction industry.
ROIC vs WACC
Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, the return on invested capital should be higher than the weighted cost of capital. For the past 12 months, Quanta Services' return on invested capital is 5.88, and its cost of capital is 8.05.
In conclusion, the stock of Quanta Services (PWR, Financial) appears to be modestly overvalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 71.86% of 1322 companies in the Construction industry. To learn more about Quanta Services stock, you can check out its 30-Year Financials here.
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