July 2017 Vol. 72 No. 7
Features
Utility & Communications Construction Business Update
By Daniel Shumate Director, FMI Capital Advisors Inc.
EDITOR’S NOTE: The past 25 years have seen many changes in the underground utilities universe. Technology advances, regulatory activity and environmental requirements have dictated major alterations in the way companies are managed. Rating as one of the foremost changes is the evolution of the business model for contractors and utilities. Roll-ups, mergers and strategic acquisitions in the face of boom/bust markets have altered the way contractors and utilities do business. To keep pace with the shifting business, Underground Construction has partnered with the industry’s leading economic consulting company, FMI, to provide quarterly updates on market activities.
As the heart of the construction season is upon us, the opportunities for utility and communications contractors remains very strong. Work in the Permian Basin in Texas and advancements with other key pipelines across the country are driving pipeline opportunities for the oil and gas segments. Investor-owned utilities maintain their significant capital programs in the distribution of gas and have begun building rate cases to address the power distribution infrastructure, as well. We also see commitments by major communications companies, such as Verizon, to large multi-year contract opportunities as they seek to build the network necessary to provide 5G service to major cities across the country.
The Utility & Communications Construction (UCC) Index presented here covers the sector’s publicly traded stocks over the past six months (Figure 1). The segment outperformed the broader market through April and began a very sharp decline to levels more commonly seen pre-election of President Trump. There is a host of factors currently affecting valuation of public companies. Global geopolitical concerns, the inability to push through an infrastructure plan in the early days of Trump’s presidency and the swing in oil pricing have all impacted stock prices over the past month.
As we look at performance across the UCC Index, two themes emerged from public statements: the backlog and opportunity for work in the utility and communications infrastructure segments are very strong, and the weather has hindered the ability to complete the work in large regions of the country. Most do not view this as impacting year-end earnings, but simply creating soft results in the late winter, early spring.
Trading multiples experienced a sharp decline in May as optimism about the “Trump Bump” began to subside. We do not view this change as a cause for concern, but rather a return to more normal trading prior to the election. The federal government may still impact the next three years with a substantial infrastructure program; however, the path to completing the legislation is less clear as the post-election hope has given way to political realities.
Interest in the utility and communications infrastructure markets remains very strong. Both Primoris Services and Dycom made investments in the month of May that had very different drivers. Dycom invested further in its Texas operations to address the need of customers like Verizon and expand its presence in the San Antonio marketplace. Primoris made a move into the Southeast to acquire a gas distribution company to take advantage of the natural gas maintenance and new build occurring in that region. We also saw a new management group create a company that is interested in the communications segment. That company, Congruex,, has partnered with Crestview Partners to acquire engineering and construction companies focused on the communications and utility sectors. Congruex seeks to invest $500 million to consolidate communications and utility companies across the United States.
Comments