Stock Screen: Established Growth Stocks

By: Kevin Downing

In this stock screen, we set out to find equities that have relatively long histories of rising sales, earnings, and cash flow. Our logic in choosing these parameters is that if a company is capable of growing its business year in and year out, it will be more likely to continue doing so in the future. In order to identify stocks with strong track records of improving fundamentals, we searched The Value Line Investment Survey for equities that have achieved average annual sales, earnings, and cash flow growth of 20% or more over the previous five years. Of the 28 stocks that made the cut (see the list below), we have chosen to highlight MasTec, Inc. (MTZ, Financial).

MasTec, Inc.

MasTec is one of the largest infrastructure construction companies in the United States, primarily serving the communications and power sectors. On the power side, the company builds oil and gas pipelines, electrical transmission lines, power plants, wind farms, solar farms, and ethanol facilities. The communication business constructs wireline and wireless networks for large carriers (mostly AT&T (T - Free AT&T Stock Report)). It also has an installation and service business that works primarily with Direct TV (DTV, Financial). The 2013 revenue and EBITDA margin breakdown is as follows: Communications, 45%, 12.6%; Oil and Gas, 38%, 13.3%; Electrical Transmission, 10%, 9.6%; Power Generation, 7%, -5.5%.

Jose R. Mas became CEO in 2007, at which point about 90% of revenues were coming from the installation of telecom cables and other gear, with Direct TV contributing 45% of companywide sales. Mas saw an opportunity to diversify by entering the more lucrative and faster growing power and wireless markets. This proved to be a deft maneuver, as the company has been able to grow revenues from about $900 million in 2007 to an expected $4.4 billion to $4.5 billion this year, a five-fold increase. Further, MasTec has become more profitable, as EBITDA has increased faster than revenues over that same time frame. Indeed, guidance calls for that metric to come in around $420 million in 2014, seven times higher than the $59 million achieved in 2007.

The Oil & Gas pipeline business boasts a favorable mix of large pipeline jobs and shale work. The company was one of the early entrants into the shale market, which explains why it’s involved with nearly every shale play in the country, including Bakken, Marcellus, Utica, and all other Texas shales. MTZ has encountered weaker pricing trends from pipeline customers of late, which compressed margins and hurt the company's bottom-line performance. Indeed, in early June, the second quarter outlook was reduced by $0.20 a share, to $0.40, which turned out to be the end result.

However, we expect midstream activity to rebound in 2015 on a volume basis. Too, there is speculation that the Keystone XL Pipeline may receive approval after the mid-term elections, which we do not believe is reflected in the current stock price.

Management has been rather vocal about the opportunity for U.S. pipeline contractors in Mexico, a country with relatively high electricity costs and few domestic infrastructure builders. Approximately 7,500 miles of pipelines exist there today, and MasTec estimates that 6,000 miles will be added in the next four years.

In late June, the company expanded its presence in the Canadian oil sands by acquiring Pacer Construction. Pacer focuses on projects in the oil and gas production and processing, mining, and transportation industries. MasTec believes the acquisition will be slightly accretive to 2014 earnings. This move, coupled with the acquisition of Big Country in 2013, suggests management is quite bullish on the longer-term growth opportunities in Canada.

Meanwhile, project deferrals in the wireless unit should crimp profits through the rest of the year. We are cautiously optimistic that projects will pick up in 2015, considering consumers’ and employees’ ever increasing demand for data (particularly video). This should continue to hinder download speeds and spur capacity upgrades. Additionally, MasTec is looking to diversify its customer base, and thinks it can make inroads with Sprint (S) over the intermediate term. Finally, there is merit behind the company’s claims that 1 gigabit fiber optic deployment will be a solid long-term growth opportunity. MasTec announced its first major project ($250 million) on this front in June. It expects to receive additional wins before yearend.

Notably, the Oil & Gas segment is not the only one growing through acquisitions. On Oct. 20, MasTec announced that it has acquired WesTower Communications, from Exchange Income Corporation for $199 million in cash. The firm focuses on construction and maintenance of wireless networks throughout the United States. WesTower’s top line has swelled from $100 million in 2010, to $450 million in projected revenues in 2014. Sans merger integration costs, the deal should prove accretive to 2015 earnings per share in the range of $0.05 to $0.10.

Overall, long-term growth drivers still outweigh near-term concerns for MasTec. We think the company is well positioned to benefit from a number of favorable trends in the oil & gas, transmission, wireline, and wireless markets. That said, we encourage investors to wait until third-quarter results are released after the market closes on October 30th before considering these shares, in light of recent near-term headwinds.