These stocks to benefit as nation gets serious about fixing power grid

The U.S. electric grid needs a total body makeover. As growing power demands from data centers and artificial intelligence applications are driving unprecedented electricity demand, utilities are gearing up for a tidal wave of investments to expand and modernize the grid. Experts say it’s one of the quickest ways to provide more electricity. The Edison Electric Institute, the industry’s trade group, projects a massive jump in spending by U.S. investor-owned electric utilities — from $96 billion in 2014 to $202.8 billion by 2026, a 110% increase. In 2024, the projected spending total is expected to be $186.4 billion. Of that total, $59.7 billion, or 32%, is expected to be funneled toward upgrading power distribution, while $35.9 billion, or 19%, will be dedicated to transmission projects. This sets the stage for multiyear growth for specialty contractors Quanta Services , MasTec and MYR Group — all of which have strong capabilities in electric power infrastructure. Our grid “needs a tremendous amount of investment,” said Neil Mehta, managing director at Goldman Sachs and head of its Americas natural resources equity research. “You’re dealing with modern-day challenges that weren’t envisioned when we developed a lot of the most recent iterations of the grid.” The substantial investment required to modernize and expand the grid means high capital expenditures for utilities, which Goldman analysts said typically translates to higher earnings growth for infrastructure solution providers. “We continue to be very bullish on this ecosystem of the specialty contractors because the future of utility capex is very bright and these are the companies that are the one-for-one beneficiaries of it,” Mehta said. With Duke Austin, a fourth-generation lineman, at its helm, Quanta Services has a long history in electric power infrastructure. MasTec’s roots are in oil, gas and telecommunications projects, but it is evolving into an electric delivery powerhouse as it turns its attention to large transmission and distribution, or T & D, projects. MYR Group is known for building high-voltage T & D networks for utilities. The backbone of the electric grid Transmission and distribution is the backbone of the electrical grid, delivering power from generation sites to consumers. Transmission carries high-voltage power over long distances to regional hubs, while distribution handles the lower-voltage delivery to end users. Much of this infrastructure was built more than 60 years ago, making it outdated and in need of major upgrades and replacements. Grid retrofitting is needed to address the rising power demand that is coming from the electrification of transportation, more frequent severe weather such as hurricanes, and population growth. However, data centers are the “single largest contributor to that power demand growth” in the U.S., Carly Davenport, utilities research analyst at Goldman Sachs, said in an interview with CNBC. Davenport sees surging power demands from data centers as a “key driver of potential upside around transmission and generation” capital expenditures. That’s because new AI servers are power hungry, consuming more electricity as processing speeds increase. Taken together, the rising energy demands make it clear that the aging grid infrastructure will eventually not be able to handle growing power needs. Quanta Services Quanta Services, a leading specialty contractor with a strong track record in electric grid construction and a deep understanding of utility needs, is considered a secular winner in the utility capex theme. The company is seeing record levels of bids and requests for proposals focused on expanding transmission capacity. During the company’s third-quarter earnings webcast on Oct. 31, Austin, its CEO, said the company is “positioned for decades of expected necessary infrastructure investment.” Large transmission projects are the “cheapest form of generation,” Austin said, suggesting that utilities see these projects as the most cost-efficient way to increase power supply. Management has estimated another year of double-digit earnings growth in 2025. Goldman’s Mehta attributed Quanta’s long-term growth trajectory to its “unparalleled relationships” with utilities. Quanta is “advising them 20 years into the future and they’re effectively imbedded in their resource planning process with these companies,” he said. Quanta’s stock has surged 58% so far in 2024 and is priced at a premium to its peers, with shares trading at a price-to-earnings ratio of 33.9 — well ahead of its five-year average of 20.4. Yet, Mehta believes Quanta’s growth prospects justify its extended valuation and argued that it’s a buy during market pullbacks. MasTec’s stock has also seen massive gains this year, surging 87%, also making its valuation look stretched with a P/E of 29. MYR Group, on the other hand, has yet to see this type of gain, despite a similar growth profile, prompting Mehta to recommend the stock. PWR YTD mountain Quanta Services shares year to date MasTec MasTec has been in comeback mode. Operational issues on key projects in 2022 and 2023 pressured the company’s margins, but MasTec is showing early signs that it can become a strong competitor in utility T & D. “Energy load growth in the U.S. will have a substantial impact on our business as our customers meaningfully increase their investment in both generation and grid expansion,” CEO Jose Mas said during the company’s third-quarter earnings webcast Nov. 1. Following MasTec’s strong third-quarter results , Truist upgraded the stock to buy from hold, saying the company is a strong generator of free cash flow with a healthy balance sheet and growth ahead. The firm increased its price target to $173 from $133, implying a 21% upside to current levels. MTZ YTD mountain MasTec shares year to date Even with MasTec shares soaring 87% year to date, industrials analyst Jamie Cook said the stock is still “trading at a significant discount.” He estimates earnings before interest, taxes, depreciation, and amortization margins will grow by double digits in the next few years. Cook’s conviction comes from the recent transformation of MasTec’s portfolio after the acquisitions of two large T & D utility services providers: INTREN, and Henkel’s & McCoy. The deals drastically expanded its capabilities and footprint. MasTec’s operating margins have underperformed Quanta’s, but Cook expects that as MasTec grows its market share, the added scale should help margins expand and rival its competitor. MYR Group Goldman expects MYR Group is well positioned for 2025. Execution challenges on solar projects have weighed on the company’s top and bottom lines, resulting in muted stock performance in 2024. Delayed solar panel deliveries had held up installations and led to rising costs, while bookings were hurt by increased competition for clean energy projects. But analyst Ati Modak suspects the company is through the worst of it. MYRG YTD mountain MYR Group shares year to date. After MYR Group reported third-quarter results that showed its project activity was above expectations, Modak raised the firm’s price target to $153 while reiterating a buy rating in a Nov. 3 report to clients. Modak’s conviction lies in the challenged projects nearing completion by the end of 2024, which should create potential for revenue growth and operating margin expansion in its T & D and commercial and industrial segments. MYR said it will be “very selective” about which solar projects it takes on in the future, weighing various factors such as project size, cost and customer profile before it commits to the work. While some project uncertainties may hurt fourth-quarter performance, Modak estimates 5% revenue growth in the electric contractor’s T & D unit in 2025, followed by 8% to 9% growth in the upcoming years. Modak said “MYRG’s top three market share position” results in “strong bidding activity” and opportunities in data center construction that will drive its growth in the years to come.