Underground Infrastructure - October 2023 - 20

Utility and Communications
FIGURE 6: UCCI Company Performance. Source: FMI Research, S&P Capital IQ;
as of September 15, 2023
FIGURE 7: Recent Deal Activity
Announced
Sept. 2023
Sept. 2023
Aug. 2023
Target
Matrix Industrial Cleaning Services
CWC Energy Services
Bigham Cable Construction
June 2023
Acquirer
Undisclosed
Precision Drilling
Dycom Industries
Business Description
Industrial Cleaning
O&G drilling
OH & UG Fiber Services
Underground Infrastructure Services Duke's Root Control Wastewater and gas inspection,
diagnosis and remediation
Continued spending on America's aging infrastructure,
the significant investments by the federal government
through IIJA and the IRA, and the spending connected
with an ongoing energy transition, will provide the capital
for continued growth from the UCCI companies.
prior three years (FIGURE 1), one year
(FIGURE 2), and the past three months
(FIGURE 3). Companies in the UCCI
have had an incredible three-year run in
the public markets. The UCC Index is up
133 percent over the past three years, relative
to the S&P 500 that has only increased
by 32.6 percent over the same period.
Continued spend on aging infrastructure,
the significant investments
by the federal government through IIJA
and the IRA, and the spending connected
with an ongoing energy transition,
provided the capital for continued
growth from the UCCI companies.
Additionally, the ongoing industry consolidation
has also increased both the
revenue and market capitalization of the
broader index over this timeframe.
Over the last 12 months, the perfor20
OCTOBER 2023 | UndergroundInfrastructure.com
mance of the UCC Index relative to the
S&P 500 remained strong. UCC Index
companies experienced stock price improvements
of 22.4 percent, while the S&P
500 grew 14.1 percent over the same period.
The themes are largely the same as the
potential for improvements in oil and gas
transmission and distribution construction
due to the rise in oil and gas prices.
The simple solutions of strategic oil
reserve releases are not enough to counter
the decrease in production that has
occurred in the OPEC countries. U.S. oil
and gas infrastructure construction could
go a long way in tempering the price increases
that the consumer will feel if the
prices remain at elevated levels.
The last three months have represented
a normalizing of stock performance
relative to the S&P 500. Modest correction
is expected after the last three years of
significant growth. There is some concern
that at sustained higher interest rates,
infrastructure owners may find financing
new projects to be more challenging, resulting
in slowed opportunities for owners
without access to federal programs.
On average, companies in the UCCI
performed quite well and there is continued
growth in enterprise value and
profitability with strong growth rates.
Opportunities to install, repair, or replace
infrastructure remain significant and are
expected to continue for the foreseeable
future. This is layered with renewable
energy opportunities that have begun to
provide a quality margin component of
the UCC Index companies.
Dycom Industries announced a share
repurchase program during the quarter,
suggesting that the Board believes the
stock is currently undervalued relative
to its earnings and growth potential. This
follows both Quanta Services and MYR
Group's announcement of a share buyback
program in May and provides increased
confidence for sustained growth
and profitability in the sector.
The pace of underground infrastructure
mergers and acquisitions remained
muted in the third quarter of 2023. The
primary areas of interest for acquirers
remain the communication and power
markets - finding a way to participate in
the federal spending on infrastructure remains
a primary objective.
As interest rates rise and valuations
decline, the gap between what a seller
is looking for and what a buyer views as
acceptable begins to widen and creates
a more challenging acquisition environment.
Expect deal activity in the remainder
of 2023 to be down significantly from
2022, due to high costs of financing and recessionary
concerns related to the Federal
Reserve's interest rate increases. UI
DANIEL SHUMATE,
Managing Director,
FMI Capital Advisors Inc.
http://www.UndergroundInfrastructure.com
Underground Infrastructure - October 2023

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