Trade of the Day: Quanta Services (PWR)

by John Jagerson | September 20, 2013 8:48 am

Trade of the Day: Quanta Services (PWR)

Although Quanta Services (PWR[1]) is headquartered in Texas, the need for its utility services extends far beyond the borders of the state, and Quanta has been a key contributor on some of the country’s most critical infrastructure and emergency relief  projects.

The most obvious reason why I am bullish on Quanta right now is the ongoing Colorado Flood[2] natural disaster.  My hopes and prayers are with the people in Colorado who are affected by this tragic event.  While I never enjoy speculating on disastrous events, as investors, we have to take the information presented to us, and objectively deploy capital to companies that have the potential to be of help during cleanup and restoration, and Quanta is one of those companies.

The most recent disaster report from Colorado, according to utility provider Xcel (XEL[3]) is as follows:

  1. ~4,460 customers without natural gas
  2. Water flooding substations and damaging about 20 miles of natural gas pipelines.
  3. Number of roads damaged or destroyed is unknown. Sections of three U.S. highways — 34, 36 and 72 — and various mountain roads are heavily damaged

There hasn’t been confirmation yet that Quanta will be contracted to perform services, however, Quanta does list Xcel energy as one of their clients in their annual report.  Quanta also carries the reputation of being the recognized industry leader in live-line work, with 15 years of operational experience and 4.6 million man-hours of energized work. Either way, the work required now and in the future will drive revenues and profits for Quanta in the near term.

Let’s assume that Quanta does get contracted to perform the work in Colorado.  When Quanta serviced events like this in the past, how much of a financial impact did they have on revenues, and how has the stock price reacted?

I took a look back at Quanta’s 2005 report, when Hurricane Katrina happened and the 2012 report, when Hurricane Sandy happened.  In 2005, the company reported $167.6 million related to Hurricane Katrina and Rita emergency services.  Since emergency service work is billed out at higher marginal rates, the company enjoyed higher gross margins on the year of 13.8%, up from 11.2% in 2004. In 2012, the company reported revenues of $77.2 million related to emergency services for Hurricane Sandy. Gross margin was helped as it was in 2005, increasing to 15.8% from 13.4% in 2011.

In addition to the emergency services revenue from the disasters, Quanta also benefited from add-on services required to rebuild roads, bridges, power transmission lines and natural gas pipelines.

9 20 13 1 Trade of the Day: Quanta Services (PWR)[4]

You can see from the monthly chart above that natural disasters have often marked a bullish breakout in the company’s shares or marked an important bottom in the shares.

The Trade Setup

Now let’s turn to a shorter time frame chart of Quanta, the one year daily chart.  In October 2012, Quanta reported an EPS beat of 12 cents, easily surpassing the estimate of 36 cents per share.  That sent the stock rocketing up on October 31, 2012, up to $26 from $24 prior to the release.  Shares continued to rise, but oscillated $1 in price above and below the $26 level up until the start of December when the company raised their fourth quarter EPS guidance. The raised guidance sent shares from $26.50 to $30 per share between December and January.

 9 20 13 2 Trade of the Day: Quanta Services (PWR)[5]

Then Quanta lowered guidance in February, but investors weren’t scared off by the news, and took that as an opportunity to buy the stock on the dip.  The stock drifted down, heading into the next earnings report in late April, but never fell below the important $26 support level.  Quanta raised their guidance at their April earnings release and the stock made a renewed surge up to a 52-week high at $30.56.

The stock once again drifted down to support at $26, and bears attempted to force the stock below that price level three separate times, but failed to push the stock lower for good. The stock moved higher in July heading into its earnings release, and the company beat the EPS estimate of 34 cents by four cents.

Since then the stock has faded lower, back down to the $26 support level, but from July to now, the MACD has developed a text book bullish divergence even though price has returned to the June lows.

Recommendation

Finally, on September 16, 2013, the MACD histogram indicator issued a buy signal, as the stock gapped higher out of the $25.50-$26.50 congestion zone.  Although it was unable to close at the highs, Quanta still managed to close above its gap opening price. That was a relative outperformance compared to other stocks in the S&P 500 index, which gapped higher but closed below their opening gap level.

We recommend a long position in PWR shares heading into their next earnings release that is expected in late October.  There is a high probability that Quanta will likely be awarded work by Xcel (likely funded by FEMA), and that, that news is likely to have as positive of an effect on gross margins as Hurricane Sandy and Katrina did in the past.

Stock Trade: Buy PWR under $27.50 a share with an initial upside target of $30 per share. A break above resistance at $30 following the next earnings report should continue to be held long.

Options Alternative: Options traders may consider buying the PWR November $27 calls for $1.40 per share or less.

InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader[6], a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here[7].

Follow John Jagerson[8] and Wade Hansen[9] at Google+!

 

 

 

Endnotes:
  1. PWR: http://studio-5.financialcontent.com/investplace/quote?Symbol=PWR
  2. Colorado Flood: http://www.weather.com/news/colorado-floods-fewer-missing-20130919
  3. XEL: http://studio-5.financialcontent.com/investplace/quote?Symbol=XEL
  4. [Image]: http://investorplace.com/wp-content/uploads/2013/09/9-20-13-1.png
  5. [Image]: http://investorplace.com/wp-content/uploads/2013/09/9-20-13-2.png
  6. SlingShot Trader: http://slingshot-trader.investorplace.com/index.html
  7. by clicking here: https://order.investorplace.com/?sid=QP7117
  8. John Jagerson: https://plus.google.com/115711248746858558308?rel=author
  9. Wade Hansen: https://plus.google.com/108450692850544646698?rel=author

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