MasTec's End Markets Are Positioned for Steady Long-Term Growth

Equity Analyst

Brett Castelli

MasTec is a leading infrastructure construction company for customers in the telecom, renewable energy, utility, and oil and gas pipeline industries. The company primarily operates in North America.

MasTec’s strategy has focused on repositioning its portfolio toward growing end markets in recent years. The company has made large acquisitions within the electric utility and renewable energy industries to better position for energy transition growth opportunities and away from a slowdown in its oil and gas pipeline segment. In 2021, nearly 60% of segment adjusted EBITDA was from the oil and gas segment. In contrast, this is expected to be less than 30% in 2024.

The company’s communications segment (30% of 2023 adjusted EBITDA) primarily serves wireless and wireline customers. We expect a favorable growth outlook for this segment driven by 5G deployments and expanding fiber builds. MasTec is well positioned given its leading position in wireless market and second position in wireline.

The clean energy and infrastructure and power delivery segments (40% of 2023 adjusted EBITDA) are well positioned to benefit from the energy transition. The company has built a leading construction company for wind and solar projects via organic and inorganic growth. We see a favorable long-term demand outlook for these services given the need to decarbonize the electric grid. In addition, MasTec’s power delivery segment—which primarily serves electric utilities—should benefit from continued need to invest in the electric grid.

MasTec’s oil and gas segment has seen a contraction in revenue and profit contribution in recent years as pipeline construction activity has slowed. We expect a relatively subdued growth outlook for this segment in the years to come. Potential green shoots from carbon capture and hydrogen pipeline projects represent incremental opportunities.

MasTec has delivered strong long-term revenue growth via a combination of organic growth and acquisitions. We would expect acquisitions to remain a consistent piece of the long-term strategy but expect the company to focus in the near term on deleveraging and margin expansion within newly acquired businesses.

Business Strategy & Outlook

We assign MasTec a no-moat rating. We believe MasTec has certain segments (namely its oil and gas pipeline division), that are worthy of a moat, but do not believe the business as a whole has justified a moat. Our no-moat rating is consistent across our wider engineering and construction coverage universe.

We believe engineering and construction firms generally lack moats because of intense competition, significant customer power, and the relatively standardized nature of most projects. Most customer contracts are awarded through a bidding process, with price and acceptance of risk large determining factors. Furthermore, E&C firms have to contend with cyclicality and event risk, which could be caused by a number of factors, including labor shortages, subcontractor performance, and inclement weather. In upcycles for end markets, E&C firms often show signs of excess returns, but these are often temporary once a given end market normalizes.

MasTec serves as a specialty contractor within the broader engineering and construction industry. Relative to full-service engineering, procurement, and construction, or EPC, firms, specialty contractors are typically weighted more toward the “C” (construction) and less toward the “E” (engineering) and “P” (procurement). This results in a larger proportion of small construction and maintenance work and less large, complex project risk compared with broader E&C peers. The specialty construction industry is generally highly fragmented with a large number of competitors ranging from national or large regional companies to many small local competitors. In addition, customers within the utility (and to a lesser extent telecom) industries may directly perform (via an internal workforce) similar services as third-party contractors. 

MasTec contracts with customers either on a specific project basis or via master service agreements, or MSAs, which are typically multiyear agreements (1-3 years). MSAs are generally awarded through a competitive bidding process, but extensions may be negotiated without robust competitive bidding. For the year 2022, MSAs accounted for 51% of MasTec’s revenue. While MSAs have a degree of customer stickiness—many contractors tout MSA relationships that have been around for decades—we believe they fall short of garnering a moat. MSAs provide little contractual protection for the contractor and generally can be terminated on short notice. In addition, customers are typically not obligated to a minimum level of spending under MSAs, although some MSAs have such clauses or targeted spending amounts. 

We view MasTec’s strongest competitive positions to be within its oil and gas and communications segments. Oil and gas, which has consistently earned the highest margins historically, is the company’s only narrow moat business, in our view. The company excels at building large-diameter interstate pipelines, which demand large workforces, specialized equipment, and complex permitting/construction. The complexity with building such projects leads customers to have a high aversion to risk, focusing on contractors with established track records and less on price, which we view as representative of switching costs for MasTec, the market leader.

MasTec’s communications segment focuses on contracting services for wireless and wireline customers, where the company is number one and number two, respectively. We view this segment to have elements of a moat but ultimately award it no moat. MasTec’s national footprint and number one position in wireless represent a formidable barrier to new entrants, in our view, where customers (wireless companies) are nationwide. In contrast, we view there to be less of a moat in its wireline operations, where customers have a more regional focus. This segment consists of a large portion of MSA-type work, which has elements of switching costs. However, the limited contractual protection (that is: contractual spending levels, length) leaves us viewing such business as no moat.

We view MasTec’s clean energy and infrastructure and power delivery segments as being less moaty than its other segments. Clean energy and infrastructure has historically been among MasTec’s lowest-margin segments. The majority of this segment is composed of building renewable energy projects with the remainder focused on civil and environmental work. We view the wind and solar EPC business as no moat given relatively simple construction and low barriers to entry, particularly for solar projects. MasTec’s power delivery business has primarily been built through acquisitions in recent years. This segment can largely be divided into electric transmission and distribution work. We view there to be more moat arguments in large electrical transmission projects, which require greater technical (specialized equipment) and financial requirements. However, we expect the majority of the segment’s contribution to be from small transmission and distribution where barriers to enter and switching costs for customers are lower, in our view. Such work is often under MSAs, which we view as no moat, as discussed earlier.

None

Economic Moat

MasTec

MasTec, Inc. engages in the provision of infrastructure construction services. It operates through the following segments: Communications, Oil and Gas, Clean Energy and Infrastructure, and Other. The Communications segment performs engineering, construction, maintenance, and customer fulfillment activities related to communications infrastructure, primarily for wireless and wireline/fiber communications, and install-to-the-home customers. The Oil and Gas segment offers services on oil and natural gas pipelines and processing facilities for the energy and utilities industries. The Clean Energy and Infrastructure segment serves energy, utility and other end-markets through the installation and construction of power generation facilities, including from clean energy and renewable sources such as wind, solar and biomass, as well as various types of heavy civil and industrial infrastructure. The Other segment consists of equity investors, other small business units that perform construction, and other services for a variety of international end-markets. The company was founded by Jorge Mas Canosa on July 26, 1968, and is headquartered in Coral Gables, FL.

Earnings data Q1 2024

MasTec exceeds Q1 guidance, anticipates $6B annual revenue by 2024

MasTec's Q1 2023 performance slightly exceeded guidance, with record backlog and significant revenue growth expected across segments. However, challenges in cash flow and uncertainties in the Clean Energy business were noted. The company anticipates strong growth opportunities and aims to achieve $6 billion in annual revenue by 2024.

MasTec reports strong Q2 earnings, anticipates significant renewable segment growth

MasTec's Q2 2023 performance was strong, with revenue growth and improved EBITDA margins. However, revenue challenges and project delays in the clean energy segment impacted financial results. The company sees opportunities in wireline growth and significant renewable segment growth in 2024.

MasTec reports strong revenue growth but faces segment-specific challenges

MasTec reported strong revenue growth but faced challenges in several segments, leading to lower-than-expected adjusted EBITDA. Despite this, the company sees opportunities for growth in the Clean Energy segment and expects potential upside across various business segments. The market is healthy, but project selection remains a challenge.

MasTec reports strong Q4 earnings, eyes growth in renewables

MasTec's Q4 2023 showed strong revenue growth and positive performance in key segments. Challenges in Power Delivery and revised revenue outlook due to specific impacts were noted. Opportunities lie in moderate growth expectations, optimism in Oil and Gas, and double-digit Communications revenue growth.

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MasTec (MTZ) adds $150 million to existing share repurchase plan of $129 million.

MasTec (MTZ) Boosts Share Buyback Plan by $150 Million

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In the latest trading session, MasTec (MTZ) closed at $67.68, marking a -0.99% move from the previous day.

News for MasTec Stock (MTZ)