Quanta Services Initiating Coverage Report

8/10/2019 Quanta Services Initiating Coverage Report

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RE-INITIATING COVERAGE REPORT William C. Dunkelberg Owl FundOctober, 22

nd2014

Jesse Barone: Lead Analyst

[email protected]

Ethan Friedland: Associate Analy

[email protected]

Joseph Heidt: Associate [email protected]

Sector Outperform

Recommendation: BUY

Key Statistics:Price $31.44 52 Week Low $2

Return 18.27% 52 Week High $3

Shares O/S (mm) 212.9 Yield 0.

Market Cap (mm) $6,720 Enterprise Value $6

1 Year Price Graph:

Earnings History: Fiscal Year SeptemberQuarters EPS Rev. YoY Price

3Q13 $0.43 -2.00% 1.48%4Q13 $0.45 9.00% 7.60%1Q14 $0.38 11.00% -0.31%2Q14 $0.40 26.00% -4.23%

Earnings Projections:Year Q1 Q2 Q3 Q4

2012 $0.25 $0.36 $0.45 $0.52

2013 $0.36 $0.35 $0.43 $0.45

2014(Q3e,Q4e) $0.38 $0.40 $0.55 $0.53

2015e $0.45 $0.57 $0.66 $0.59

All prices current at end of previous trading sessions f

date of report. Data is sourced from local exchanges

CapIQ, Bloomberg and other vendors. The William C.

Dunkelberg Owl fund does and seeks to do business w

companies covered in its research reports.

COMPANY OVERVIEW

Quanta Services Inc. is a specialty contracting and infrastructureservices company operating primarily in the U.S. (79.9% of FY 2013revenue), with some operations in Canada (17.3%), and internationally(2.8%) as well. Quanta is a full service engineering, procurement, andconstruction service provider, which owns the largest specializedequipment fleet in the industry. With a highly skilled work force of21,000 individuals, Quanta is the premier provider of services withinthe engineering and

construction industry. Thecompany is divided intothree segments: ElectricPower InfrastructureServices (68.7% of FY 2013revenue), Oil & GasInfrastructure Services(28.7%), and Fiber OpticLicensing and Other (2.6%).

INVESTMENT THESIS

Quanta Services is currently trading at a 23.19% discount to its five

year historical EV/EBITDA average. Investors have recently starteddevaluing Quanta because of the recent economic data that has comeout showing signs of a global economic slowdown and morespecifically, a slowdown in the US economy. Investors have alsobegun to devalue PWR because of the recent pullback in the energysector, in which 30% of PWRsFY 2013 revenue was generated from.Investors felt that with energy companies not being as profitable asthey once were because of lower oil prices, those companies wouldbegin to push off capital expenditure projects since some of theprojects can be delayed without severe effects to the companiesday-to-day operations. Pushing these projects off will hurt the energycompanies efficiency,but in the short-term, that is not a top priorityas some of these companies are struggling with profitability. Quantacurrently has three economic moats which are a capital intensive

nature of the industry, a large scope of services, and an industryleading brand that customers recognize as the best company withinthe industry giving Quanta a competitive advantage over itscompetitors. Looking forward, investors have not accounted forQuantas ability to continue to win contracts and expand its backlog,future acquisitions, synergies from prior acquisitions, and the agingelectric power infrastructure of the US and Canada. Taking thesecatalysts into account, we believe Quantas EV/EBITDA multiple

will appreciate to its five year historic trading level of 9.72x, and reachour target price of $37.24, representing a return of 18.27%.I

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Quanta Services Inc.Exchange:NYSE Ticker:PWR Target Price:$37.24


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Fall 2014

T h e W i l l i a m C . D u n k e l b e r g O w l F u n d Pag

SEGMENT OVERVIEW

Electric Power Infrastructure Services

Electric Power Infrastructure Services made up 68.7% of the CompanysFY 2013 revenue. In this segment, PWR designs, installs, upgrades, repairs,and maintains electric power transmission, distribution networks, and

substation facilities.

Oil & Gas Infrastructure Services

PWRsOil & Gas Infrastructure Services business made up 28.7% of FY2013 revenue. In this segment, PWR designs, installs, maintains, and repairspipeline transmission and distribution systems, gathering systems,compressor stations, and pump stations.

Fiber Optic Licensing and Other

Quantas Fiber Optic Licensing and Other segment makes up theremaining 2.6% of the Companys FY 2013 revenue. In this space, PWRdesigns, procures, constructs, maintains, and owns fiber optic

telecommunications infrastructure of dark and lit fiber.CONTRACTS

Contract Types

For FY 2013, PWRsrevenue consisted of three different types ofcontracts. Fixed contracts made up the largest percentage of FY 2013revenue at 46%, followed by unit price contracts at 34%, and cost pluscontracts at 20%. PWR normally goes after contracts that are focused onnew construction projects. These types of projects made up 60% of FY2013 revenue, while master service agreements (MSAs) made up 27%.MSAs are contracts where parties agree to most of the terms that willgovern future transactions or agreements. MSAs permit the parties toquickly negotiate future transactions or agreements, because they can relyon the terms of the master agreement and negotiate only the deal-specificterms. Maintenance and repair projects made up the remaining 13% of FY2013 revenue.

Contracts Won

PWRs most recent contract came on August 21, 2014 for the Chino HillsSegment of Tehachapi Renewable Transmission Project, which Quanta willprovide construction services for the 500-kilovolt underground project.Services include infrastructure installation, road borings, manholes, andsteel risers. Another contract won by Quanta was a contract fromLabrador-Island Link Partnership to install 684 miles of 350 kilovoltoverhead high voltage transmission lines. This contract was the largest evercontract awarded to PWR in the electric transmission segment (no dealamount was released). In addition, PWR was selected by PPL ElectricUtilities on July 2, 2014 to install transmission infrastructure for theNortheast Pocono Reliability Project. PWR's scope of work for the projectincludes the installation of approximately 68 miles of new 230-kilovolt and138-kilovolt overhead transmission line, erection of steel transmissionstructures, installation of concrete foundations, and the construction andmaintenance of access roads.

RISKS

Regulatory Environment: Eachsegment is subject to governmentregulations such as registration, licensingand pollution regulations. An increase in

regulations or the inability to comply withthese regulations would delay currentprojects and add extra costs.

Labor Union Relations: Quantasworkforce is about 49% unionized withthe International Brotherhood ofElectrical Workers and Canadian Unionof Skilled Workers. Any conflicts with thCompany and the unions could result insignificant disruption in operations.

Fixed Price Contracts: Fixed-pricecontract amounts are established in parton cost and scheduling estimates that arebased on a number of assumptions,including those about future economicconditions, prices and availability of laboequipment, and materials. If theseestimates prove inaccurate, the companybears the risk of paying some or all of thecost overruns

ECONOMIC MOATS: Narrow & Stable

Capital Intensive: The Construction anEngineering Sector, especiallycontracting, is a capital/fixed assetintensive industry. Few companies havethe capital structure that allows them toinvest in tools, equipment, and othercapital expenditures necessary to becompetitive in the sector, creating a highbarrier to entry for prospectivecompetitors.

Efficient Scale: Quanta provides a widerange of services within each segmentacross North America. The differentservices work together across segmentsand geography to spread out fixed costsand create operating efficiency betweeneach segment.

Brand: Quanta is the industry leader in

providing contract services of deliveringinfrastructure solutions. Thus, PWR isrecognized by industry professionals asthe superior contractor within theinfrastructure service industry. Thisrecognition allows Quanta to win highlyprofitable contracts for its services.


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Catalysts

Contract Wins/Backlog Growth

PWR continues to win contracts such as the Chino Hills Segment of Tehachapi Renewable Transmission Project, whichPWR will provide construction services for the 500-kilovolt underground project. Services include infrastructureinstallation, road borings, manholes, and steel risers. Another contract won by Quanta was a contract from Labrador-Island Link Partnership to install 684 miles of 350 kilovolt overhead high voltage transmission lines. This contract wasthe largest contract ever awarded to Quanta in the electric transmission segment (no deal amount was released). Due tothe contract wins PWR has experienced, backlog has continued to grow at a strong pace, with Q2 FY 2014 growing at15% YoY. Backlog has slightly decreased from the end of 2013, but we do not view this as a major concern becausePWRsbacklog is being converted at a higher rate than historically. This is shown by the Company estimating that57.29% of its backlog will be converted in the next 12 months, while at the end of 2013, the company estimated onlyabout 54% of its backlog was going to be converted in the next 12 months.

Acquisitions

In the second quarter of 2014, PWR completed an acquisition of a small geotechnical and geological engineering servicescompany. During the first quarter, PWR completed five acquisitions. Four of these acquisitions were located in Canadaand are electric power infrastructure service companies, which were made to help diversify PWRs geographic offering.

The fifth acquisition was a general engineering and construction company specializing in hydrant fueling, waterfront andutility construction for the Department of Defense, and will be reported under the Oil & Gas segment. We see theseacquisitions as potential growth drivers for the company moving forward because even though they were of smaller size,they enable PWR to penetrate additional markets and gather expertise in those markets without having to go through thegrowing pains if PWR did it alone.

Electric Power Infrastructure

There are several trends going forward that will provide growth opportunities for PWR in this segment. The first ofthese trends is the overall aging infrastructure in the US and Canada. Since a lot of the infrastructure is old, the reliabilityit provides for customers/clients is poor; companies are trying to take advantage of newer, more reliable technology that

will also improve efficiency and customer experiences. Along with improving the infrastructure, more power generationfacilities will have to be built in order to keep up with the new infrastructure, and just overall demand increasesexperienced in North America. Another trend moving forward is renewable energy and natural gas becoming a more

prevalent source of energy. With both of these new forms of energy, especially renewables, significant infrastructure isrequired to not only be able to capture the energy from these sources, but there is significant infrastructure needed toconvert and transport this energy to make it usable by consumers. As a result of these trends, we think there is thepotential for larger types of contracts,such as the one PWR just won, tobecome available for the Company to

win. This will not only increase revenueand earnings, but also increase PWRsmargins by allowing it to be moreselective of the contracts it agrees to.

Analysts estimated that thus far in 2014,$8B of mid to large sized contracts havebeen awarded in North America. In

2015 and 2016, analysts are projectingan estimated cumulative contract totalof more than $67B will be awarded. Theincrease in available contract volume

will give PWR negotiating power,allowing the Company to become moreprofitable and expand margins.


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INDUSTRY OVERVIEW

Electrical Power Grid Infrastructure Spending

The electric grid in North America needs extensive improvements due to decades of underinvestment and the changingneeds of the country. The improvements in reliability started in 2003 when a blackout in the Northeast, Midwest andCanada lasted four days and cost up to $10 billion in economic losses. Transmission spending has increased to morethan 3x historical spending levels. According to The C Three Group, 17 of the most active U.S. utilities, based on

transmission spending from 200813, are expected to increase their aggregate transmission spending by 81% from 2014till 2020.

Electricity demand is expected to grow in the US by about 1.1% a year through 2030. Over the next decade, the worldwill need to invest between $140.2B to $170.5B per year on traditional transmission and distribution (T&D)infrastructure in order to keep pace with growth in electricity demand. An additional $8-27.3B will be invested annuallyin smart grid infrastructure to improve the efficiency and reliability of T&D grids, according to a new dataset publishedby Northeast Group, LLC. However, North America and Europe will see lackluster growth in traditional T&D

infrastructure spending of around 1%, but will account for the majority of smart grid spending. Smart grid annualspending on distribution automation will be concentrated in Europe ($11.5 billion per year), followed by North America($7.5 billion) and East Asia($6.1 billion), as these regionsmodernize their existingelectric infrastructure. TheObama administration hasmade an $11 billion downpayment on a more efficientgrid. That has included $4.5billion in grants to develop aso-called smart grid, whichapplies the speed and powerof the internet to the

generation, transmission anddistribution of electricity.

TARGET PRICEPWR is currently trading at a 23.19% discount relative to

its five year historical EV/EBITDA average. Multiplying

the target multiple of 9.72x by NTM EBITDA of

$795.80mm yields an enterprise value of $7,735.18mm.

Subtracting debt and preferred of $5.80mm and$15.20mm, and adding back cash of $188.90mm yields an

equity value of $7,903.00mm. Dividing the equity value of

$7,903.00mm by 212.2mm shares outstanding yields a

target price of $37.24 and a return of 18.27%.

Historical Average Target Price= $37.24Historical Average Multiple =9.72xNTM EBITDA = $795.80

PEER GROUP IDENTIFICATION

Flour (NYSE:FLR):Professional services company providingengineering, procurement, construction, fabrication andmodularization, commissioning and maintenance, and projectmanagement services worldwide.

Jacobs Engineering (NYSE:JEC):Provides a broad range oftechnical, professional, and construction services to clients acrossnine different industries globally.

MasTec Inc. (NYSE:MTZ):Infrastructure construction companproviding engineering, building, installation, maintenance andupgrade services to five different industries primarily in the U.S..


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Fall 2014


Regulations Affecting the Electrical Power Grid

There has been an increase in regulation from the EPA in this industry. The two major regulations are the Mercury andAir Toxins Standards (MATS) and the Cross-State Air Pollution Rules (CSAPR). According to SNL Energy data, U.S.power producers plan to shutter 27,143 MW coal capacity between 2014 and 2022. 13,550 MW of that will be retired assoon as the MATS takes effect. Under CSAPR, power plants in 28 states will have to reduce their sulfur dioxideemissions by 75% from 2005 levels, and their nitrogen oxide emissions by 54%. Also, the EPA is requiring coal-firedpower plants to install flue gas desulfurization equipment, which cost hundreds of millions of dollar each. There havealso been further EPA proposals that would require new natural gas-fired power plants to reduce their pounds of CO2per megawatt-hour by about 39%, and 30% for existing power plants.

The purpose of the Clean Power Plan unveiled by the EPA is suppose to cut carbon emission from US power plants by30% from 2005 levels by 2030. The regulation aims at the 600 coal powered plants and hopes these are converted tonatural gas power or become more efficient. Regulation affecting the electrical power grid will mostly be around gridreliability. Poor forecasting by the EPA means the reliability of the electrical grid will be threatened due to coalshutdowns, as coal serves as baseload power for much of the country. This means that coal provides a constantminimum rate of power throughout the day needed to keep the lights on.

Key Pipeline Trends

Increasing gasification is shaping the long term demand profile for pipes. Over the next twelve years there is an expected35% increase in the demand for gas, as natural gas is expected to account for 26% of total energy consumption by 2030.This growing demand is also driving an increase in larger diameter pipelines.

Investment in new infrastructure to support LNG and unconventional gas developments will be a major factor shapingfuture demand for pipelines. Outside the major oil province of the Middle East, gas-related lines accounted for 67% ofkm installed over the past five years. This figure is expected to increase over the 2013-2017 time period.

Increased investment in shale gas and oil will drive additional requirements for midstream pipes in the US. Surging Asianenergy demand is changing traditional supply flows domestically and abroad. Asia will overtake North America as thelargest market for onshore pipelines within the coming decade as the region looks to increase imports of oil and gasfrom neighboring regions.

The US and Canada will require midstream natural gas investment of $205.2 billion over next 25 years ($8.2billion per year).

New infrastructure will be required to move natural gas from regions where production is expected to growand to areas where demand is expected to increase.

Natural gas consumption is expected to grow at 1.6% per year within North America.

Roughly 29 Bcfd of incremental pipeline capacity is being built between 2011 and 2020; and from 2021 to 2035 anadditional 14 Bcfd is being built. A total of 43 Bcfd of incremental pipeline is needed to accommodate increasing gassupply that is necessary to satisfy market needs over time. These maps do not show intra-regional pipeline expansionssuch as those that occur within the Marcellus shale production area.


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Miles of Pipeline Added and Projections

Most new pipe (about 16,500 miles) is gathering line, which is generally smaller diameter pipe that is plannedfor and financed as part of upstream project development.

An average of approximately 2,000 miles of new transmission line is added each year, which is well within therange of recent years. Roughly 1,400 miles per year are mainline miles, while about 600 miles per year are forlateral connections to power plants, processing plants, and other facilities.

FINANCIALS

Revenue

Revenue for FY 2013 was reported at $6,523mm, a 10.2% increase YoY. Revenue has grown at a five year CAGR of18.4% and is expected to grow at an 8.1% CAGR until 2016. For Q2 FY 2014, PWR reported revenue of $1,865mm, a

YoY increase of 26.5%. This growth is being driven by both the Electric Infrastructure and Oil & Gas Infrastructureservices segments.

Electric Infrastructure

This segment reported sales of $4,481mm in FY 2013, representing a 6.5% increase YoY. In Q2 FY 2014, revenue wasreported as $1,239mm, representing an 18.4% increase YoY. This increase was driven by the continued improvementthat is needed for the North American electric grid and increased utilities transmission spending.

Oil & Gas

Oil & Gas reported revenue of $1,870mm in FY 2013, a 21.8% increase YoY. In Q2 FY 2014, PWR reported revenueof $585mm, representing a 51.7% increase YoY. This increase was driven by the recent North American energy boomand the infrastructure that is subsequently needed to support the production of additional infrastructure such as newbuilding new pipelines, or maintaining/repairing the old pipelines to ensure their safety and reliability.


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Margins

PWR has seen inconsistent expansion in marginsthroughout its history, but always seem to hoveraround the same range. From 2011-2013 marginshave stayed between 15-15.9% for gross margin,5.9-6.5% for EBITDA margin, and 3.2-3.7% forprofit margin. Year to year, margins are dependenton the mix of projects that the company does, thepricing environment, and simply the weather whichcan have adverse or positive effects on margins.However, even with these inconsistencies inexpansion, the company has always had superiormargins across the board compared to competitors.Going forward, the company is expecting slightcompression in margins due to a different mix of contracts and the harsh weather in the beginning of the year, whichaffected the efficiency in which contracts were being done. Gross margin is expected to compress to 15.9% compared to16.2% in 2013, but then expand to 16.4% in 2015. EBITDA margin is expected to compress to 10.3%, compared to10.6% in 2013, but expand in 2015 to 11.2%. Profit margin is expected to expand to 5.2%, compared to 6.5% in 2013,but expand again to 5.8% in 2015.

Earnings

While Quanta has beaten quarterly earnings estimates 6 out of the 10 previous quarters, the Company has reallystruggled to beat earnings estimates as it has missed analyst estimates in 4 of the past 5 quarters. The Company saw adrastic increase in net income between 2011 due to a 41.17% YoY sales growth that was driven by electric distributionservices demand created by Hurricane Sandy,new contract wins in the NGP segment,along with the completed payment of itspension plan withdrawal liability in FY 2011.

This led to EPS increasing 126.9% YoYfrom 2011. For FY 2013, net income grew37.8% YoY, yet only grew 0.6% to $1.53 pershare due to costs associated with the sale of

equity ownership interest in Howard Energy,along with additional legal expenses. Lookingforward, FY 2014 EPS is estimated tobe $1.83 (19.3% growth YoY), withconsensus estimates projecting 2015 and2016 EPS to be $2.24 and $2.44,representing YoY growth of 22.7% and 8.8%respectively.

Capital Expenditures

Quantas capital expenditures involve expanding the network capabilities of its FOL segment, expanding overallconstruction vehicle fleet size, along with establishing facilities in new business sub-segments. CAPEX has increased at a

CAGR of 12.43% from $165.0mm in 2009 to $263.6mm in 2013. In 2013, Quanta allocated approximately $450mm tothe FOL segment, while $24mm was invested in vessels in order to enhance the companys offshore oil and gasinfrastructure sub-segment. From 2013 to 2016, CAPEX is expected to grow at a CAGR of 1.85% from $263.6mm to$278.5mm, with a spike in 2014 of $298.4 in capital expenditures.


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Cash Flow

From 2009 to 2013, CFFO increased at a CAGR of 16.76% from $240.3mm in 2009 to $446.6mm in 2013. In 2012,CFFO actually decreased to $166.8mm, the lowest levels since 2006. The decline was due to increased short termspending and more flexible terms on receivables for its larger ongoing projects at the time. Quanta saw such a largeincrease in CFFO from 2012 to 2013 due to the completion of major projects during the year that drove net income up37.8% YoY. CFFO is expected to grow from $446.6mm in 2013 to $612.5mm in 2016, representing a CAGR of 11.10%.

This projected growth is attributed the forecastedcompletion of projects which will increase netincome and decrease unbilled revenues and currentliabilities. From 2009 to 2013, FCF decreased at aCAGR of 3.60% from $211.9mm to $183.0mm. Freecash flow was positive in all of these years except for2012. During 2012, Quanta encountered significantlyhigher working capital costs from some of its largerongoing operations. From 2013 to 2016, FCF isexpected to grow at a CAGR of 22.1% from$183mm in 2013 to $334 in 2016. FCF growth willbe driven by net income growth along with thecompletion of larger projects.

BACKLOG

2013 backlog was reported at $8.7 billion, a 24.9% increase YoY. 44% of the backlog consists of master serviceagreements. This increase was driven by the Electric Power segment backlog, which increased to $5.9 billion from $4.9billion in 2012, representing a 21.3% increase YoY. The Oil & Gas segments backlog increasedto $2.2 billion from $1.6billion in 2012, representing a 41.6% increase YoY. For Q2 FY 2014, PWR reported a backlog of $8.7 billion up 15.6%

YoY. Backlog for the Electric Infrastructure segment was $5.9 billion, up 18.8% YoY. Oil & Gas segment backlog wasreported at $2.2 billion, an 8.2% increase YoY. Lastly, the Fiber Optics segment reported a backlog of $594mmrepresenting an increase of 14.2% YoY. These increases have been driven by utilities implementing system-hardeninginitiatives and increasing networks as demand increases, as well as the large need for improvements to the North

American oil and gas infrastructure due to increased shale plays and pipeline projects.

ACQUISITIONS

Quanta is an acquisitive company by nature and during FY 2013 made six acquisitions. Quanta paid a total $341.1mm incash and $88.9mm worth of common stock. These companies expanded Quantas presence in the Midwest,Northeast, Central Canada, and Australia. These companies increased Quantas capacity to provide mechanicalinstallations for offshore oil and gas companies, pipeline logistics to a broader area of the country, and pipelineconstruction services to Australia. In Q1 FY 2014, Quanta completed five acquisitions. Four of these five companies

were electric power infrastructure services companies located in Canada. The fifth company is a general engineering andconstruction company, based in California, specializing in hydrant fueling, waterfront and utility construction for U.S.Department of Defense military bases. Q2 2014 saw the acquisition of a small geotechnical and geological engineeringservices company based in the U.S. that is included in Quantas Electric Power Infrastructure Services segment. Quantapaid for these acquisitions with $83.2mm in cash and $38.6mm in common and preferred stock.

SHAREHOLDER RETURNS

On December 6, 2013, Quanta announced the authorization of the repurchase of up to $500 million of Quantascommon stock over the following 3 years until 2016. During Q2 2014, the Company purchased approximately 1.3million shares of common stock that amounted to $45.0mm. Buying back shares reflects managements confidence inlong term growth opportunities along with a commitment to delivering increased value to shareholders.


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VALUATION

Original Undervaluation

Quantas devaluation began at the end of FY 11 after Quanta revised earnings guidance down due to a $32.6 mm feeassociated with the withdrawal from the Central States Southeast and Southwest Areas Pension Plan. The large fee along

with a full year performance that was dragged down by the negative operating margin of the NGP segment resulted in asteep multiples contraction. Afterwards investors remained bearish on the company, where the stock price onlyincreased by 3% after Quanta reported a Q1F12 that experienced a 68% YOY sales growth and an EPS that beatestimates by 56%. At the end of 2012, Quanta experienced another multiple contraction after Hurricane Sandy inflatedsales and earnings, and price only responded by increasing 1%. Within the last year, Quanta has consistently beatestimates with strong sales and earnings growth, however this achievement continues to be overshadowed bymacroeconomic events such as the government shutdown, and the Syrian event.

Undervaluation

Until recently, Quantas multiple had seen strong expansion from its original level of 8.80x EV/EBITDA when it wasinitially bought. However, PWRs EV/EBITDA multiple has seen significant contraction in the last month. Initially, thecontraction began because of weak economic data coming out, especially the construction and manufacturing data. Alsocontributing to the decline in PWRs multiple has been the recent energy selloff. Since PWRs highest growth segment

has been its pipeline infrastructure segment, with energy companys profitability coming into question with the declineof oil prices, PWRs ability to convert on its backlog and be awarded new contracts came into question as the energycompanies had things that were of higher importance than a new pipeline, or infrastructure upgrades.

PWR is currently trading at an EV/EBITDA multiple of 7.89x, when historically it trades at a 9.72x EV/EBITDAmultiple on a 5 year historical basis, representing a discount of 23.19%. Multiplying the target multiple of 9.72x by NTMEBITDA of $795.80mm, yield an enterprise value of $7,735.18. Subtracting debt of $5.80mm, subtracting preferred of$15.20mm, and adding back cash of $188.90mm, yields an equity value of $7,903.0. Dividing the equity value of$7,903.0mm by 212.2 shares outstanding yields a target price of $37.24, yielding a total expected return of 18.27%.

Target EV/EBITDA

9.72x

NTM EBITDA

$795.80

Target Price

$37.24


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Peer Group Valuation

The companies used in the relative valuation are Jacobs Engineering Group Inc. (JEC), MasTec Inc. (MTZ), and FluorCorporation (FLR). These three companies were the original three companies used in the initial relative valuation andare all companies that are within the construction and engineering sub-sector. PWR is currently trading at a 16.36%discount to its competitors on a five year historical EV/EBITDA basis. PWR usually trades at 1.28x its competitorsmultiple, but it currently only trading at 1.10x its competitors multiple. Dividing the historic premium by the currentpremium yielded us the 16.36% discount, and when multiplying the current EV/EBITDA multiple of 7.89x by the meanfactor of 16.36%, yields a target multiple of 9.18x. Using this target multiple and multiplying it by the NTM EBITDAyields an enterprise value of $7,305.44mm. Adding back cash of $188.90 and subtracting debt and preferred of $5.80 and$15.20, yields an equity value of $7,437.34mm. Dividing by shares outstanding of 212.20mm yields a target price of$35.22, which equates to an 11.84% return.

Target EV/EBITDA

9.18x

NTM EBITDA

$795.80

Target Price

$35.22


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Fall 2014


Discounted Cash Flow

AssumptionsThe 7 year CAGR for sales growth of 7.38% was found by using analyst consensus sales growth until 2016, and thentapering the sales growth off to a sustainable 5.0% for in 2020. Margins are expected to remain pretty consistent in 2014to 2013 levels, then expand in 2015, 2016, and 2017 after the benefits from restructuring related activities and thesynergies reached from acquisitions, especially with SKM, are realized.

WACCThe WACC of 13.22% was calculated using the five year average weights of 99.48% equity and 0.52% debt. Cost ofequity of 11.78% was calculated using CAPM, in which the expected market return was 9.91%, risk free rate of 2.13%,and the beta used was 1.240. The cost of debt of 1.13% was calculated using a tax rate of 34.10%, short-term debt

weight of 29%, short-term rate of 0.33%, long-term debt weight of 71%, long-term rate of 2.14%, and an adjustmentfactor of 1.06.

WACC

13.222%

EM Method

EM: 10.0x

$40.18

FCF Equity

P/E: 17.0x

$37.62

GP Method

GP: 0.2%

$43.34


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Fall 2014


DISCLAIMERThis report is prepared strictly for educational purposes and should not be used as an actual investment guide.The forward looking statements contained within are simply the authors opinions. The writer does not own anyQuanta Services Inc. stock.

TUIA STATEMENTEstablished in honor of Professor William C. Dunkelberg, former Dean of the Fox School of Business, for histireless dedication to educating students in real-world principles of economics and business, the William C.Dunkelberg (WCD) Owl Fund will ensure that future generations of students have exposure to a challenging,practical learning experience. Managed by Fox School of Business graduate and undergraduate students withoversight from its Board of Directors, the WCD Owl Funds goals are threefold:

Provide students with hands-on investment management experience

Enable students to work in a team-based setting in consultation with investment professionals.

Connect student participants with nationally recognized money managers and financial institutions

Earnings from the fund will be reinvested net of fund expenses, which are primarily trading and auditing costsand partial scholarships for student participants.

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Quanta Services Initiating Coverage Report