Underground Construction - October 2018 - 10

Daniel Shumate|Director, FMI Capital Advisors Inc.

Utility & Communications
Construction Update

T

The Utility & Communications Construction (UCC) Index underwent another update as the Granite acquisition of Layne Christensen was approved during the past quarter. Per the three-year
(Figure 1), one-year period (Figure 2) and year-to-date (Figure 3)
Index, the market is viewing the growth prospects of select UCC Index companies differently.
The UCC Index year-to-date is negative and down significantly
compared to the S&P 500, which is near 8-percent growth. The decline is related to the lowered expectations of investors in communications construction due to the timing of 5G fiber implementation, the change in guidance for
For most companies
both Dycom and Mastec, and
margin compression attributed
in the power and gas
to the cost of labor in the condistribution markets,
struction markets.
The trend observed in the
growth is strong and
last UCC Update has reversed.
expected to continue.
Dycom, Mastec and other comThose with exposure to munications contractors experienced a substantial pullback
midstream transmission in valuation because they were
unable to provide the earnings
have experienced some growth that the stock analysts
were looking for. Because the
challenges due to the
underlying requirements for 5G
permitting and approval and the fundamentals for the
process associated with utility and communications industry remain strong, we would
putting pipelines into
expect the companies to regain
traction as work moves out of
service.
engineering.
For most companies in the power and gas distribution markets,
growth is strong and expected to continue. Those with exposure
to midstream transmission have experienced some challenges due
to the permitting and approval process associated with putting
pipelines into service. For example, the Atlantic Coast Pipeline has
gone through various issues with regulators, permitting and land
procurement that have impacted the contractors performing work
on the line.
Rather than look at the most-recent operating performance, this
quarter we dove into the return on equity (RoE) and underlying drivers of the metric - return on assets (RoA) and leverage. By evaluating
RoE with a Dupont Analysis, it's easy to understand why a company may be viewed as risky by the market and viewed more favorably
while doing similar work.
RoE measures the return on one's equity investment in a company
and can be broken into distinct elements that illustrate what drives
the metric. Mastec and Dycom have historically high RoE, while companies like Quanta, MDU or Granite have a more muted return. The
10

OCTOBER 2018 | UConOnline.com

Figure 1: 3 Year UCC Index

Figure 2: 1 Year UCC Index

Figure 3: Year-to-Date UCC Index

Figure 4: UCCI Average Return on Equity

2015

2016

MDU

2011
7.68%

-0.03%

2012

2013
9.77%

2014
9.18%

-24.69%

2.78%

2017
11.58%

LTM

PWR

3.91%

8.13%

9.48%

6.56%

10.07%

5.93%

8.30%

8.34%

MTZ

13.07%

12.46%

13.80%

10.10%

-8.39%

11.89%

24.22%

24.22%

DY

10.02%

8.21%

8.24%

16.63%

23.10%

23.41%

18.99%

15.54%

GVA

6.18%

5.19%

-4.63%

3.10%

6.95%

6.19%

6.96%

8.44%

PRIM

21.30%

17.06%

17.48%

13.92%

7.63%

5.36%

12.87%

11.56%

ARE

1.75%

14.29%

6.92%

4.58%

9.56%

6.20%

3.65%

4.69%

AEGN

4.09%

7.35%

6.10%

-5.76%

-1.36%

5.12%

-13.67%

-15.55%

MYRG

8.48%

13.45%

11.74%

11.33%

8.28%

8.14%

7.37%

8.72%

MTRX

9.51%

8.14%

10.08%

12.69%

6.03%

9.15%

-0.06%

0.68%

GV

5.70%

43.82%

12.17%

-1.04%

12.75%

26.94%

14.67%

13.63%

Mean

9.24%

12.55%

9.20%

7.39%

4.54%

10.10%

8.63%

8.37%

Median

8.48%

8.21%

9.77%

9.18%

7.63%

6.20%

8.30%

8.72%

11.80%
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Underground Construction - October 2018

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