Quanta Services Earnings: Renewables Segment Outperforms; Announcement of Transformer Acquisition

We maintain our $138 fair value estimate for no-moat Quanta Services PWR following its third-quarter results. We continue to like Quanta’s end-market exposure and solid execution but consider these already reflected in its valuation and see shares as overvalued.

Quanta shares rose (up 9% at the time of writing) following the results. We view the positive reaction as a sigh of relief from investors following cautious data points in recent weeks from customers and peers. We make modest tweaks to our model to align with the company’s revised 2023 guidance, but the net result is immaterial to our fair value estimate. Among the most positive takeaways from the results is the company’s renewables segment continues to outperform peers, with revenue poised to increase over 50% year on year as the utility-scale solar market bounces back following a subdued 2022.

In conjunction with the results, the company announced the acquisition of Pennsylvania Transformer Technology, a domestic manufacturer of power transformers and components for $300 million in cash and stock. The company’s annual revenue is above $100 million currently and Quanta sees an opportunity to expand production capacity beyond its current level. We view the deal as relatively immaterial in the context of Quanta overall, while marking a continued willingness from Quanta to pursue acquisitions beyond the traditional scope of its business.

Our medium-term financial expectations continue to be at or above consensus estimates, according to PitchBook. The disconnect between our valuation and the current market price is largely explained by long-term assumptions in our discounted cash flow model related to operating income growth and return on invested capital.