We recently compiled a list of the 7 Best Engineering Stocks to Invest in. In this article, we are going to take a look at where Quanta Services Inc. (NYSE:PWR) stands against the other engineering stocks.
Is the Engineering Sector Going to Boom?
In an era where infrastructure and technology converge, the engineering industry stands as a cornerstone of economic growth and innovation. As we navigate through the remaining months of 2024, the demand for robust engineering solutions, ranging from construction to advanced manufacturing, has surged, driven by significant investments in transportation, clean energy, and urban development. This dynamic landscape presents a unique opportunity for investors looking to capitalize on the potential of leading engineering firms.
The global engineering services market is booming, with its size estimated at $3.26 trillion in 2023 and projected to grow at a compound annual growth rate of 5.5% from 2024 to 2030, as reported by Grand View Research. Several factors are driving this growth, including technological advancements, infrastructure development, and the demand for sustainable solutions. Automation, AI, and the IoT are becoming increasingly adopted, leading to enhanced productivity and efficiency. Rapid urbanization, government investments in infrastructure, and a focus on eco-friendly practices due to stringent environmental regulations are also contributing to the market’s expansion.
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With strong market demand, technological advancements, resilience during economic fluctuations, and supportive government initiatives, the engineering sector stands out as a promising investment opportunity. Moreover, a new report from the Global Infrastructure Hub reveals a significant global infrastructure investment gap. To meet the demands of a growing population and a rapidly urbanizing world, $97 trillion will be needed by 2040. This includes $94 trillion to support economic growth and an additional $3.5 trillion to meet the UN Sustainable Development Goals for water and electricity access.
The report underscores that current spending trends fall short of these needs. An annual investment of $3.7 trillion is required to bridge the gap, which is equivalent to Germany’s annual GDP. To meet the SDGs for water and electricity, an additional $236 billion per year is necessary. The US faces the largest infrastructure funding gap, estimated at $3.8 trillion. China, on the other hand, has the highest demand, requiring $28 trillion in investment. The report highlights the critical role of infrastructure in achieving the SDGs. However, current investment trends are insufficient to meet the targets for water and electricity access.
To address this challenge, governments and the private sector must collaborate to mobilize significant funding. This includes exploring innovative financing mechanisms, such as public-private partnerships, green bonds, and impact investing. By investing in infrastructure, countries can unlock economic growth, create jobs, and improve the quality of life for their citizens. However, failure to act could lead to significant economic and social consequences.
As this month began, Sadek Wahba, I Squared Capital founder and chairman, also a member of President Biden’s Advisory Council, joined CNBC’s ‘Squawk Box’ on October 11 to discuss the economic toll of hurricanes in the context of investing in America’s infrastructure.
Recovery efforts are underway following the devastation caused by Hurricane Milton, which has left many communities grappling with significant damage. Sadek Wahba emphasizes the pressing need for resilient infrastructure to withstand future storms and climate changes. Early reports suggest that the extent of the damage from Hurricane Milton is greater than initially anticipated. The infrastructure challenges posed by such storms raise critical questions about how to fortify communities against future disasters. The discussion pivots to the broader issue of infrastructure investment and who should bear the costs associated with building resilient systems capable of withstanding climate-related events.
Wahba noted that the willingness of citizens to pay for infrastructure improvements is crucial. Over the past 70 years, the US has invested less than 2% of its GDP in infrastructure, while China has consistently invested around 8% over the same period. This stark contrast highlights the urgent need for increased investment in US infrastructure to address vulnerabilities exposed by recent natural disasters. The $1.2 trillion infrastructure bill passed under President Biden aims to tackle these issues but requires additional funding sources, including user fees and private capital investments. When discussing what an appropriate investment level might be, Wahba emphasized that both quantity and quality matter. Funding through taxes versus private capital carries different implications for how infrastructure is developed and maintained. He points out that user fees, such as tolls on roads and public transportation fares, are essential for sustainable funding models. However, he acknowledged that there are challenges associated with ensuring equitable contributions from all users.
There are also regional disparities in willingness to fund infrastructure projects. Some individuals may resist contributing to recovery efforts in areas like Florida or Texas if they feel disconnected from those communities’ needs. Wahba argued that a state-by-state approach will be necessary for effective policy-making and funding allocation. He also highlighted the critical need for improvements in water resources across the US. With 55,000+ water authorities, 90% of which are government-owned, many systems are underfunded and struggling to provide quality water access to millions of Americans.
In the aftermath of Hurricane Milton, the urgent need for resilient infrastructure has brought attention to engineering stocks that are well-positioned to benefit from increased investment in rebuilding efforts. Engineering companies are at the forefront of providing innovative solutions to enhance infrastructure resilience against climate-related challenges. With the US historically underinvesting in infrastructure compared to countries like China, there is a significant opportunity for these engineering firms to step in and deliver essential services.
Our Methodology
We sifted through ETFs, online rankings, and internet lists to compile a list of 15 engineering stocks with high market caps. We then selected the 7 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024. The hedge fund data was sourced from Insider Monkey’s database which tracks the moves of over 900 elite money managers.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A closeup of a hand holding a car engine component, highlighting the precision of the company’s engineering.
Quanta Services Inc. (NYSE:PWR)
Market Cap as of October 22: $46.17 billion
Number of Hedge Fund Holders: 63
Quanta Services Inc. (NYSE:PWR) provides infrastructure services for electric power, pipeline, industrial and communications industries. It offers a wide range of services, including the planning, design, installation, program management, maintenance, and repair of most types of network infrastructure.
Revenue made in the second quarter of 2024 totaled $5.59 billion, marking an improvement of 10.81%, along with a record total backlog of $31.3 billion and strong cash flow. The company’s results reflect the strength of its portfolio, effective execution, and continued demand for its services, driven by customers’ multiyear programs to build renewable generation and power grid infrastructure.
Its collaborative solution-based approach is highly valued by clients, particularly in the context of the ongoing energy transition and infrastructure upgrades. Its strategic initiatives and goals for the coming years are expected to drive significant growth. The company’s diverse service lines and geographic reach expand its total addressable market, providing opportunities for resource allocation and operational efficiencies.
Quanta Services Inc. (NYSE:PWR) recently completed the acquisition of Cupertino Electric for $1.54 billion, including $1.3 billion in cash and $225 million in Quanta shares. The deal includes a potential additional payment of up to $200 million based on financial targets. This acquisition is expected to immediately boost Quanta Services Inc. (NYSE:PWR)’s growth, cash flow, and earnings per share, with projected contributions of $175-$195 million to adjusted core profit and $0.40-$0.50 to adjusted diluted earnings per share for FY25.
The company’s diverse service offerings and strategic focus on infrastructure investment position it well for long-term growth in the evolving energy landscape. With a robust financial position and commitment to operational efficiency, it is well-positioned to capitalize on attractive opportunities.
Artisan Mid Cap Fund stated the following regarding Quanta Services, Inc. (NYSE:PWR) in its fourth quarter 2023 investor letter:
“Along with DexCom, notable adds in the quarter included Quanta Services, Inc. (NYSE:PWR) and Jabil. Quanta provides outsourced skilled labor for maintenance and construction services, primarily to utilities. We have followed the company for over a decade and have witnessed its shift from oil and gas to renewables. The energy transition (solar and wind farms, electric vehicles, etc.) requires investments in the US energy grid to support greater electrification. At the same time, climate change is increasing stress on the existing grid, forcing utilities to increase maintenance spending. Furthermore, Federal incentive programs, such as the Inflation Reduction Act and Bipartisan Infrastructure Act, will help fuel Quanta’s long-term growth given its expertise in transmission and distribution connections as renewable energy infrastructure seeks to connect to the grid. The stock sold off early in the quarter on concerns that higher interest rates would lead to a pullback in renewables investments by utility customers. However, based on our industry research, we think Quanta’s key customers are well resourced and committed to meeting long-term electrification needs via infrastructure investment. We used the selloff as an opportunity to move the position into the CropSM at a more attractive valuation.”
Overall PWR ranks 1st on our list of the 7 best engineering stocks to invest in. While we acknowledge the growth potential of PWR, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PWR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.