MasTec Vulnerable For Downside Risk At $77?

After a solid 3x rise since the March 23 levels of last year, at the current price of around $77 per share we believe MasTec Inc. stock (NYSE: MTZ), an infrastructure and construction company, has reached its near-term potential. MTZ stock has rallied from $26 to $77, significantly outperforming the S&P which moved 70% over the same period, with the resumption of economic activities as lockdowns are gradually lifted and vaccines are being approved in multiple countries. The outperformance of MasTec can partly be attributed to better than estimated Q2 and Q3 earnings, clubbed with expected pickup in infrastructure projects when the new administration is formed. MTZ stock is also up 90% from levels of $40 seen in early 2019, two years ago.

Much of the 90% rise of the last 2 years can primarily be attributed to changes in the company’s P/S (price-to-sales) multiple. Looking at fundamentals, total revenues were up 4% from $6.9 billion in 2018 to $7.2 billion in 2019 and $6.4 billion over the last twelve months. The company saw a 4.5% decline in total shares outstanding, resulting in a 9% growth in revenue per share to $95.57 in 2019, compared to $87.81 in 2018. Given the growth in RPS, the company’s P/S ratio expanded. We believe the stock has rallied meaningfully and it is likely to see downside after the recent uptick. Our dashboard, ‘Buy Or Fear MasTec Stock’, has the underlying numbers.

MasTec’s P/S multiple changed from 0.5x in 2018 to 0.7x in 2019. Now that the company’s P/S has expanded to 0.8x, there is a potential downside risk when the current P/S is compared to levels seen in the recent years.

So what’s the likely trigger and timing for downside?

MasTec over the recent quarters has seen strong growth in its non Oil & Gas segments, a trend that will likely continue in the near term. The company’s total revenues of $4.7 billion for the nine month period ending September 2020, reflects a 14% decline compared to the prior year period. Oil & Gas segment saw its revenue drop 53%, more than offsetting the 19% combined growth seen in other segments, including Communications, Electric Transmission, and Clean Energy & Infrastructure. The decline in Oil & Gas can be attributed to the impact of Covid-19 on the overall demand, while the Communications business is seeing an increased demand due to rollout of 5G.

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Now that the vaccines have been approved in multiple countries, the worst of the pandemic will hopefully soon be behind us and MasTec will likely see a pickup in demand in 2021. That said, much of this is likely already priced in the current stock price of $77. In reality, full year 2020 sales are estimated to be down 10% to $6.5 billion and its earnings are estimated to be down 4% to $5.04 on a per share and adjusted basis. Given that the stock has rallied despite falling revenues, the company’s P/S ratio has expanded. Even if we were to look at forward revenues, going by the consensus revenue estimate of $7.5 billion in 2021, MTZ stock is trading at 0.8x its RPS of around $102 for 2021. This compares with levels of under 0.5x seen in 2018 and 0.7x as recent as late 2019, implying that the stock is vulnerable to downside risk.

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