Grid Modernization And Data Center Projects Will Support Long Term Earnings Potential

Catalysts

About MYR Group

MYR Group is an electrical construction services company focused on transmission and distribution infrastructure and commercial and industrial projects across the U.S. and Canada.

What are the underlying business or industry changes driving this perspective?

• Record total backlog of US$2.84b and strong first quarter bidding across both T&D and C&I provide multi year visibility on project activity, which can support revenue and earnings consistency.
• High mix of recurring T&D master service agreements, about 70% of segment revenue in the quarter, offers repeat work with long term utility customers, which can help smooth cash flows and support operating margins.
• Rapid growth in data center construction activity referenced in industry outlooks, alongside rising demand for complex power, water and wastewater projects, aligns closely with MYR Group’s C&I capabilities and may underpin revenue and backlog expansion.
• Industry focus on grid modernization to handle growing electrification and digital demand, highlighted by new MSAs and high voltage line awards, positions the T&D segment to pursue larger, higher complexity projects that can support operating margin targets of 8% to 11%.
• Company wide focus on better contract terms, greater use of prefab in controlled environments and disciplined project execution is already visible in higher C&I and T&D margins, and can continue to support gross margin and net income performance.
• Strong balance sheet with US$163m in cash, US$9m of funded debt and low leverage, combined with increased CapEx directed at growth opportunities in T&D and prefab capacity, gives flexibility to pursue acquisitions that can add to revenue and earnings over time.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on MYR Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming MYR Group's revenue will grow by 12.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.7% today to 4.9% in 3 years time.
• The bullish analysts expect earnings to reach $266.8 million (and earnings per share of $18.23) by about July 2029, up from $141.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 42.7x on those 2029 earnings, down from 46.1x today. This future PE is greater than the current PE for the US Construction industry at 41.1x.
• The bullish analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.74%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The current margin strength in both segments is supported by projects progressing at higher contractual margins, favorable change orders, productivity benefits and a few favorable job closeouts. If future work lacks these supports or includes more projects with inefficiencies, gross margin and operating margins in T&D and C&I could compress, which would weigh on earnings.
• A very high mix of fixed price contracts in C&I, around 86% of the segment, increases exposure to cost overruns, labor inefficiencies and material cost swings over multi year project timelines. Any sustained pressure on execution could erode net margins and reduce net income.
• The company is leaning into master service agreements in T&D, with about 70% of segment revenue tied to MSAs and a backlog policy that only recognizes roughly 90 days of that work. If utilities slow spending or rebid these agreements on tighter terms, the recurring revenue profile could soften and reduce visibility on future revenue and cash flow.
• Large high voltage transmission projects, including 345 kV and 765 kV lines, are expected to take time before construction activity converts to revenue, and the 10 K language flags that some major awards may not generate revenue until at least 2027. Any delay, cancellation or re scoping of these longer dated projects could limit backlog conversion and revenue growth in later years.
• The business model increasingly depends on data center and critical infrastructure work plus higher capital expenditure at about 3% of revenue, which raises exposure to shifts in long term data center demand, funding priorities in power and water and potential project competition. If these trends slow or pricing becomes more aggressive, revenue growth and EBITDA expansion could be harder to sustain.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for MYR Group is $564.0, which represents up to two standard deviations above the consensus price target of $455.0. This valuation is based on what can be assumed as the expectations of MYR Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $564.0, and the most bearish reporting a price target of just $295.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $5.4 billion, earnings will come to $266.8 million, and it would be trading on a PE ratio of 42.7x, assuming you use a discount rate of 8.7%.
• Given the current share price of $419.78, the analyst price target of $564.0 is 25.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.