On Tuesday, infrastructure construction company MasTec (MTZ) hit its 44th 52-week high of the past 12 months. It was one of 49 stocks hitting 52-week highs yesterday. That compares to 37 lows.
At first glance, a stock hitting its 44th 52-week high would appear to have a stretched valuation. However, before you brand MTZ stock as uninvestable because it's run too far in the past 12 months, consider that out of 171 stocks trading on NASDAQ and NYSE with market caps of $10 billion or more, that have hit 52-week highs in the past year on 40 or more occasions, MasTec is 132nd, about the half the number of Targa Resources (TRGP), which has 85 52-week highs.
That’s not to say MasTec doesn’t have valuation issues that make it too late to buy. I look at both sides of the argument.
Oh, Yeah. It’s Way Too Late.
The momentum play has increased 115% over the past 52 weeks, which is not only a 52-week high but an all-time high. As I write this, in pre-market trading, it’s up another $1.37 (2.4%) to $154.21, so somebody feels there are still gains to be had.
Before you buy MasTec stock, it's important to remember that it is in a very competitive industry with pretty low margins relative to other industries, such as technology. If you're used to fat margins from software companies, you don't want to invest in a company whose margins are more akin to those of a grocery store chain.
MTZ stock trades nearly 52 times its trailing 12-month (TTM) earnings ending Sept. 30 and 29 times its forward earnings. That’s relatively high for a business with a TTM EBIT (earnings before interest and taxes) margin of 2.8%, according to S&P Global Market Intelligence. Kroger’s (KR) TTM EBIT margin through Nov. 9 was 3.2%.
Both make a little from a lot of revenue.
However, America's largest grocery store chain in America has a TTM P/E of 12.7x and a forward P/E of 13.4x. Further, its return on capital is 8.2%, more than double MasTec at 3.6%.
Since 1998, MasTec’s enterprise value to TTM EBIT multiple has ranged from a high of 145.0x in June 2005 to a low of 4.68x in December 2001. Today, it is 37.0x, less than the high 40s where it was in 2023, but still much higher than historical norms.
MasTec Still Has Room to Run
MasTec reported its Q3 2024 results on October 31.
CEO Jose Mas was pleased with the company’s margin expansion in the quarter. The company's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin was 9.4%, 110 basis points higher than Q3 2023, which was much higher than expected.
In addition, it reported a record backlog of $13.9 billion, up $1.4 billion from last year. Thus, there's no question the business is doing well.
While I love that it is one of the largest Hispanic-controlled public companies in the U.S., founded in 1994 by Chairman Jorge Mas, who owns 14.2% of MasTec, run by his son, Jose Mas, who owns 5.8%. Minorities owning successful businesses, public or private, is always good news.
Do you know the saying, an object in motion stays in motion unless an outside force acts upon it? Well, the same applies to stocks.
Everything about its current business efficiency suggests that such an outside force is unlikely in the near term. However, there’s no reason why it won’t attract new investors eager to ride the wave.
Further, of the 14 analysts covering it, 12 rate it a Strong Buy (4.71 out of 5). Their mean target price is $157.64, higher than where it currently trades.
In 2024, the company expects an adjusted EBITDA of $990 million on $12.23 billion in revenue and an adjusted EBITDA margin of 8.1%. Based on this guidance, MasTec expects adjusted EBITDA to grow 10% over 2023 and its margin to improve nine basis points.
The Bottom Line
If you’re comfortable with its low margins and a nosebleed valuation, MasTec is a top-notch long-term investment.
Selfishly, the question of whether it’s too late to buy MasTec stock sets up perfectly for my latest options strategy idea, which is similar, but not quite the same as a covered straddle, which involves a covered call and a cash-protected put with the same strike prices and expiration date.
I, too, am interested in generating income. However, I’m more concerned about providing myself with a better entry point and an automated stock-sale process.
Essentially, I’m looking for a put with a strike price 20% below its current share price, and expiring in approximately 30 days. As for the call, the same DTE (30 days to expiration) guideline applies, with a strike price of 50% out of the money or more. I’ll be selling both.
The strike price for the put should be around $125, and for the call, $230. Looking at the options prices in today’s trading, the best I can find is a $180 call and $125 put expiring in 37 days on Feb. 21.
Here’s the call:
Here’s the put:
The income generated from the strategy would be approximately $1.61. Because there’s no bid on the call, I’ve used the last price for both. That income is an annualized return of 9.9% [$1.61 premium/$154 share price x 365/37DTE].
Usually, I’d be happy with that kind of annualized return.
However, the call strike is only 17% out of the money, which means there’s a decent chance I’d have to sell the 100 shares of MasTec I owned.
I like the $125 put, but I’d look further out for a call strike above $200.
