MasTec, Inc. (MTZ Quick QuoteMTZ - Free Report) has been riding high on its focus on the non-oil and gas segments and acquisition synergies. Also, its substantial presence in the telecommunications market and expansion into heavy infrastructure will prove conducive to its growth profile.

In the past six months, this leading infrastructure construction company’s stock has gained 9.7% compared with the Zacks Building Products - Heavy Construction industry’s 1.3% rise. The outperformance can primarily be attributable to solid earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in the trailing 26 quarters.

Yet supply-chain disruptions, project delays and intense inflation remain potent headwinds. Owing to these headwinds, MasTec reduced its full-year guidance.

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Let’s delve deeper into the factors substantiating its Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Focus on Carbon Neutrality: President Joe Biden remains keen on enhancing research and development as well as technologies, including large-scale battery power storage and carbon capture and minimization, and modernizing infrastructure, comprising the nation’s electricity grid and a nationwide network of public charging stations for EVs. With strong visibility into the clean energy market, MasTec is well poised for growth, given its persistent focus on the clean energy market, including wind, solar, biofuels, hydrogen and storage.

As one of the largest clean energy contractors in the country, MasTec’s expertise in constructing wind farms, solar farms, biomass facilities, high-voltage transmission lines, substations, battery storage and hydrogen-enabled solutions helps it take advantage of market growth. It continues to see strong demand for renewables, with improvements in solar activity and distributed generation. As of Jun 30, the backlog at Clean Energy and Infrastructure increased 11.2% from a year ago. The Clean Energy business is expected to register revenue growth of more than 13% to approximately $2.1 billion and an adjusted EBITDA margin of 6% (excluding the industrial business).

Major Foothold in Telecommunications: The Communications segment continues to offer attractive upside opportunities, driven by 5G investment and accelerating spending by DISH as well as T-Mobile. Also, the Rural Digital Opportunity Fund, or RDOF — which is a follow-up to the Connect America Fund — will provide $20 billion of funding over the next 10 years to build and connect gigabit broadband speeds in underserved rural areas.

With the recent 5G spectrum auctions now complete, it expects revenue acceleration throughout 2022. It expects growth for the current year to be driven by the persistent expansion of fiber optic networks, investments in wireless network capacity and 5G-related work. 5G significantly enhances the number of opportunities for MasTec based on the total number of network elements involved. As the largest wireless contractor in North America, MasTec is uniquely positioned to tap these opportunities.

Segment’s backlog at June-end increased 18.7% from a year ago. For 2022, it expects Communications segment revenues of $3.2 billion, indicating more than 25% growth from 2021. The 2022 adjusted EBITDA margin is expected in the low to mid-10% range.

Inorganic Drive: On Jul 25, 2022, MasTec announced its intention to acquire Infrastructure and Energy Alternatives, Inc. (IEA). MasTec believes IEA will generate revenues between $2.6 billion and $2.7 billion and adjusted EBITDA within $160-$170 million in 2023, exclusive of any post-transaction synergies. Also, it anticipates annual cost savings of approximately $10 million, owing to the combination of reduced IEA public company reporting and other costs. It expects IEA will generate $45-$50 million of adjusted net income in 2023.

In first-half 2022, the company acquired two businesses — an infrastructure construction company focusing on water, sewer and utility projects and with expertise in excavation and site work, within the Oil and Gas segment; and a telecommunications company specializing in wireline services, included within the Communications segment.

Major Concerns

Project Delay: if the company fails to manage projects or faces project delays, it could result in additional costs or claims to the company. Its Oil & Gas pipeline segment’s top line has been witnessing a negative impact over the last few quarters due to delays in some large project activity. New project activity declined significantly during 2021. The company don't expect a meaningful improvement until 2023.

Intense Inflation: MasTec has been experiencing the general impact of inflationary pressures and labor shortages on its business, particularly for fuel, labor and materials costs. Also, MasTec’s customers are facing increased costs of steel pipe, which often account for nearly 50% of project costs, owing to supply chain issues. Labor and start-up costs and acquisition-related expenses are likely to put pressure on the bottom line. The company expects labor, fuel and materials costs to increase in the future and may continue to affect its profitability and cash flows.

Tepid Views: Owing to the above-mentioned headwinds, MasTec lowered its full-year guidance. It now expects to generate consolidated adjusted EBITDA of $750 million versus $850-$875 million of the earlier projection. In 2021, it generated an adjusted EBITDA of $931.3 million. Adjusted earnings are now anticipated to be $3.09 per share versus the earlier expectation of $4.22-$4.47 per share. The estimated figure indicates a decrease from $5.58 reported in 2021. MasTec expects 2022 revenues in the Oil & Gas segment of $1.3 billion versus $2.6 billion generated in 2021. Also, the adjusted EBITDA margin is likely to be 14% compared with 24.3% reported in 2021.

Key Picks

Better-ranked stocks, which warrant a look in the Construction sector, include TopBuild Corp. (BLD Quick QuoteBLD - Free Report) , Installed Building Products, Inc. (IBP Quick QuoteIBP - Free Report) and Simpson Manufacturing Co., Inc. (SSD Quick QuoteSSD - Free Report) .

TopBuild currently carries a Zacks Rank #3. This Daytona Beach, FL-based company is an installer and distributor of insulation and other building products to the U.S. construction industry. The company has been benefitting from increased sales volume, solid contribution from acquisitions and pricing at both businesses, despite the labor and material-constrained market.

TopBuild’s earnings are expected to rise 44% in 2022.

Installed Building also carries a Zacks Rank #2 (Buy). The company is a leading installer of insulation and complementary building products. It primarily banks on a robust pipeline of acquisition opportunities across multiple geographies, products and end markets.

Installed Building’s earnings for 2022 are expected to rise 50.4%.

Simpson currently carries a Zacks Rank #3. The company designs, engineers and manufactures high-quality wood and concrete building construction products designed to make structures safer and more secure that perform at high levels. It has been benefitting from product price increases and key growth initiatives.

Simpson’s earnings for 2022 are expected to rise 20.1%.