Investing.com -- S&P Global Ratings has upgraded the credit rating of Quanta Services Inc (NYSE: PWR ). to ’BBB’ from ’BBB-’ due to the company’s strong operating and financial performance. The rating agency also upgraded Quanta’s unsecured issue-level rating on the company’s debt to ’BBB’ from ’BBB-’ and short-term issuer rating to ’A-2’ from ’A-3’. The outlook remains stable.
Quanta Services Inc. has shown solid operating and financial performance, which is expected to support strong cash flow generation and stable credit protection metrics in the coming years. The company’s cash flow and credit measures have met the upside threshold for the rating, and these metrics are expected to be sustainable.
The company is projected to experience earnings growth, driven by the secular trends for electric power infrastructure. This growth is supported by Quanta’s leading market position and strong execution. The company’s revenue base has consistently grown over the past five years at a 14% compound annual growth rate (CAGR), supported by an average of 7% annual organic growth and boosted by strategic acquisitions.
In 2024, Quanta reported $23.7 billion in revenue, a 13.4% increase year over year. This increase includes 5% organic growth that reflects strong demand for electric power infrastructure solutions. The company’s operating leverage, improved productivity, and emergency restoration work contributed to consistent margin improvement throughout the year. At the end of 2024, its S&P Global Ratings-adjusted EBITDA margin increased to 10% from 9.5% a year before, leading to solid earnings growth with EBITDA base expanding 18% and cash flow from operations expanding 32%.
Based on the company’s $34.5 billion backlog and revenue conversion rate, it is anticipated to maintain organic revenue growth in the high-single-digit percent area over the next two years. Strong secular trends for electric load growth are expected to support sustained top-line expansion over the next several years.
Quanta’s strong backlog and its large proportion of base revenue (82%) provide a high degree of earnings stability for the next few years. The industry is heavily investing in safety, reliability, the energy transition, and data centers. This spending is expected to exceed $300 billion before the end of the decade with a CAGR of about 10%. Accordingly, 2025 capital spending is expected to reflect about $240 billion, with a focus on safety, reliability, and the energy transition.
Quanta’s steady operating performance is expected to support strong cash conversion and stable credit protection metrics. Quanta’s free operating cash flow (FOCF) of $1.6 billion in 2024 exceeded expectations, leading to FOCF to debt of 36%, which is viewed as strong for the rating. Quanta’s focus on working capital management resulted in a significant decrease in days sales outstanding (DSO) to 59 days as of the end of 2024, down from 68 days a year before.
Under the base case, cash conversion is expected to remain strong over the next several years. However, a more moderate growth pace of renewable projects in 2025 and 2026 is anticipated, which is estimated to contribute to a normalized cash conversion of about 50%. This level is believed to support the company’s capital allocation initiatives while allowing it to maintain leverage aligned with its financial policy of leverage below 2x.
Quanta has demonstrated a solid track record of adhering to its financial policy. For the past five years, its leverage was 2.1x on average and exceeded 3x only temporarily following its large acquisition of Blattner in 2021. The company showed a relatively rapid deleveraging during the subsequent 12 months.
S&P Global Ratings expects Quanta will remain active and opportunistic on acquisitions and assume $2.0 billion-$2.5 billion of acquisitions annually. The company’s funding strategy is expected to remain consistent with its historical approach and use a combination of cash, debt, and equity such that debt to EBITDA remains below 2x.
A significant portion of Quanta’s revenue is derived from fixed-price agreements for large projects and/or projects where Quanta provides engineering, procurement, and construction services. Quanta’s revenue generated from fixed-price contracts increased to 56.2% in 2024 from 49% in 2023 and 43% in 2022. However, the risk for cost overruns is largely mitigated for projects under construction and in backlog.
The stable outlook reflects the expectation that the company’s recurring revenue stream and strong secular trends will support Quanta’s sustained revenue growth and margins remaining at the stronger end of industry average, with steady credit measures. The company is expected to generate S&P Global Ratings-adjusted debt to EBITDA at about 2x and FOCF to debt of at least 20% over the next two years.
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