Weekly Equity Idea Highlight - 2019 10 02

Current market expectations for MTZ are overly pessimistic. Markets expect UAFRS-based (Uniform) ROA (ROA') to roll over to prior lows from 2015. However, the company's fundamental strategy is likely to lead to continued ROA' stability and visibility, even as the market is pricing them for a negative cycle, like many other C&E firms. MTZ's main end markets are in the communication and energy markets. In the communication market, their position as a main sub-contractor for AT&T gives them visibility, as capex spend for 5G implementation is likely to be a long-cycle demand driver for the next several years. Also, while the energy market is historically cyclical and exposed to US and global GDP, their position as a key supplier for the Keystone pipeline likely gives them long-term visibility in this end-market. While the market is viewing MTZ as a company at peak cycle ROA' that is likely to roll-over, ROA' is likely flat to up, with continued growth, in the near-term.

Management confidence in recent calls point to reasons to believe in further operational improvement. Management has had confidence in their most recent earnings calls about their backlog trends, upside in business unit margins, and around cash flow guidance in the most recent call. In prior calls, they also showed confidence around how their capital structure gives them room to grow.

Considering low market expectations, in terms of pessimism for both growth and Uniform ROA recovery, the company's strong position and strategy, and confidence about executing on their strategy for the business, current low equity valuations appear unreasonable, spelling potential for equity upside.