Quanta Services Earnings: Renewables Segment Drives an Increase in Guidance

We raise our fair value estimate for no-moat Quanta Services PWR to $138 per share from $132 following its second-quarter results. The primary driver is an increase in our renewables segment revenue expectations, which are expected to be materially higher than our prior estimate. 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 at current prices.

Quanta’s 2023 is progressing well. The company’s second quarter was in line with our expectations, and management raised full-year guidance. The higher guidance was driven by a sharp increase in revenue expectations for the company’s renewable infrastructure segment, which is now expected to grow 40% year on year (15% above the previous guidance range). We view the stronger-than-expected growth as driven by a combination of a solar market snapback (following a subdued 2022 on trade restrictions) and large transmission project activity. Revenue growth from this segment appears to be materially outperforming management’s 8%-10% annual organic revenue target announced at its investor day last year.

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.

Quanta remains well positioned to benefit from electric grid investment and the buildout of renewable energy. However, we think its valuation already reflects such tailwinds.