MYR Group was initially published as one of our 7investing Community's New Ideas in October 2024

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Background

The following comes directly from our initial Community recommendation. 7investing's opinions may differ from the person(s) who submitted this community research.

I have another company that should benefit from reduced interest rates. This one is more of a special situation but I’m actively buying now. This has it all. It operates in an industry where rates are a significant driver of work. It is also a bit of a turn around play that operates in an industry with secular growth drivers.

The company is MYR Group (MYRG). They are a small cap (approx. $1.2 billion market cap). They are contractors that operate in the electrification market. MYRG operates throughout the US & Canada. They have 2 business lines. Transmission & Distribution (T&D) and Commercial and Industrial (C&I). T&D represents a little under 60% or revenue. T&D is self-explanatory. It services the utility industry with electric generation and transmission work (such as building out and maintaining transmission lines). C&I provides installation and maintenance of wiring for commercial and industrial operations (think data centers, EV chargers and such).

Sales growth has been strong until 2024. 2021 revenue was $2.50 billion and 2023 revenue was $3.64 billion. EPS growth over this period was less impressive as management was investing in growth initiatives. 2021 EPS was $4.95 compared to 2023 EPS of $5.40.

This brings us to 2024 (the turnaround part of the story). MYRG got involved in some renewable energy projects that haven’t turned out well (I believe several of them may be in NY so if you follow renewables, NY has been a disaster for many companies due to inflation and interest rates). Essentially, MYRG got caught with some ill-timed, fixed-price contracts.

Sales in 2024 declined as management focused on problem contracts and re-evaluating its bidding process. Sales in 2024 are expected to decline to $3.44 billion and EPS to $2.15. The stock is down from a high of $210 to a little under $100 today.

Management states that the vast majority of the problematic contracts will sunset by calendar year-end so earnings should begin to ramp up sometime soon. In addition, the backlog has begun to expand as well. Regardless, you can expect a volatile next 6-months until the problematic contracts are flushed out.

So lets get to the positive side of the ledger (the secular growth story). If you believe that electrification of transportation and the growth of AI is a thing, electricity demand will expand much faster in the future. Add in the neglected investment in electrical transmission and there is clearly future demand for MYRG’s services. Reduced interest rates make such investments more profitable. MYRG is perfectly positioned to benefit. Despite a number of bad contracts, earnings have remained positive in a tough interest rate environment.

It is an international player that gives it scale to compete with many of the smaller regional companies (competitive advantage for large projects). In addition, all these companies compete in a limited talent pool for skilled employees. You can’t just send anyone up to repair a high transmission line. It is one of the larger players as far as I can tell which would give it an advantage in attracting, and retaining, talent. However, there are much larger players in the market such as Quanta Services or $PWR with a market cap of $43.9 billion. Nevertheless, while I think Quanta is the better company (it is more vertically integrated and can control more of the supply chain), over the long-term, I think MYRG will be the better stock due to valuation. There is simply too much work for $PWR to handle.

For what is worth, analysts are expecting renewed revenue growth in 2025 as well as EPS between $5.59 and $7.25. Regardless, as the problematic contracts cycle through, the underlying earnings power will be realized