MYR Group Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

MYR Group Inc. is a holding company providing specialty electrical construction services across the US and Canada, focusing primarily on transmission, distribution, and substation projects within the utility and infrastructure sectors.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

MYR Group Inc. is primarily a player in the niche market of electrical construction for utilities and infrastructures. This is a very important point to keep in mind throughout this report as they are not your typical construction company doing roads or houses, they are highly specialized in their area.

Business Overview

MYR Group Inc. (MYRG) operates through two segments: Transmission and Distribution (T&D), which is the company’s bread and butter, and Commercial and Industrial (C&I).

  • Transmission and Distribution (T&D): This segment accounts for the majority of MYR Group’s revenue (around 75-80%). It focuses on large-scale electric transmission and distribution line work, substation construction and maintenance, and emergency restoration services within the utility industry.
  • Commercial and Industrial (C&I): This segment represents the remaining portion of revenues and involves electrical construction and maintenance services for commercial and industrial projects. This includes projects like data centers, manufacturing facilities, and transportation centers.

The split between T&D and C&I segments is not equal, and because of this, the T&D segment is really responsible for a bulk of the revenue, and thus the risk that comes along with it. The T&D segment is also where they are more specialized and competitive.

MYR Group’s business model is centered around project-based work, meaning revenue and profits can be lumpy as they are dependent on how many contracts they can complete. They operate primarily in North America and have exposure to both regulated and non-regulated markets. Their primary clients are large utilities, municipalities, and private developers.

Industry Trends & Competitive Landscape

  • Industry Trends:
    • Grid Modernization: Aging infrastructure and the increasing need for renewable energy connections are driving demand for transmission and distribution upgrades. Utilities are investing heavily to ensure grid reliability, efficiency, and to integrate renewable resources. This translates to a large volume of business for MYR Group.
  • Grid Resiliency: Increased natural disasters and more frequent extreme weather events lead to a need for utilities to upgrade to be more resilient to these changes. This will also be a tailwind for the business.
*  **Government Spending:** Government initiatives to increase electrification, enhance infrastructure, and reduce carbon emissions further drive investments in power grids. The Infrastructure Investment and Jobs Act (IIJA) in the United States provides funds for these projects and also provides a multi-year vision for funding, resulting in more sustainable business and visibility into revenue.
*  **Technology and Digitization:** A growing trend in the utility industry is to automate and digitize parts of the processes. This includes implementing better controls and modern monitoring system.
  • Competitive Landscape:
    • The electrical construction industry is highly fragmented, with many regional and local players. While MYR Group is one of the largest players in North America, many competitors exist. This means competition is strong, and companies like MYR need to have a strong unique offering to be able to win a bid on large contracts. The size of this niche does not allow companies to have an unconstrained moat, which we can see in lower ROICs compared to other industries.
    • The ability to compete in the market depends on specific expertise, scale to handle large contracts, established relationships with clients and suppliers, and geographic presence.

The landscape they operate in can be described as a niche duopoly, as a few larger players such as MYR dominate the market, but are still subjected to high competition from other smaller players. Companies can carve out a good niche by having unique skills and offerings.

What Makes MYR Different?

  • Scale and Expertise: As one of the largest electrical contractors in North America, MYR Group possesses the scale to handle large and complex projects for its major clients. They have a large fleet of equipment, manpower, and specialized expertise in areas like substation construction.
  • Geographic Reach: They have a widespread presence across the United States and Canada, allowing them to serve utilities and other clients in a variety of regions.
  • Reputational Advantage: MYR has a reputation for delivering reliable work at a good price, resulting in repeat business. This shows a level of trust from its clients that the management keeps building upon.
  • Strong Relationship with clients: They have relationships with a limited number of major clients, which gives them a big boost in gaining access to future contracts.

Financials Overview

Note that they are currently showing good results and have increased guidance. They are benefitting from a positive environment.

  • Revenue Growth: MYR Group has consistently shown robust revenue growth over the past several years. This growth is driven by the increasing need for infrastructure upgrades and strong demand for their services.
    • In their latest earnings call in November 2023, MYRG increased its expected revenue and profit for the year and also for the future. For fiscal year 2023, they are now expecting adjusted EBITDA between $475 and $490 million, up from a previous forecast of $435-$465 million.
  • Gross Margin: Their gross margin is good at around 12%, but can be variable based on changes in material and input costs, and can differ based on region and project scope. They have been looking to maintain prices high enough to pass costs onto customers. Their goal to have an average gross margin of around 12% should be kept in mind.
  • Profitability: They are currently generating a good profit, and are focusing on improving that to ensure value creation. Their profitability can vary, however, as projects vary in their risk.
  • Balance Sheet:
    • They have moderate debt levels, a solid amount of cash, and good liquidity.

It is also important to note that MYR’s business is inherently a labor-intensive and working-capital intensive business, meaning both of those should be monitored. This should also be taken into consideration while projecting growth.

Moat Analysis: 2 / 5

MYR Group does possess some, but not all, qualities of a company with a strong moat. They fit the characteristics of a ‘narrow moat’ company, as they do have certain competitive advantages that enable them to generate a profit for a longer period.

These are the qualities that enable them to generate revenue for a longer period. However, these moats are not insurmountable, and there is a threat of competition.

  • Economies of Scale: They are one of the largest players in their industry, allowing them to manage operations more efficiently. They have a wide geographic presence and a large fleet of equipment.
  • Reputational Advantage: This is their biggest moat. They have built a reputation for delivering high-quality work at a good price, helping them gain repeat business and new contracts.
  • Switching Costs: For larger clients such as utilities, they want to have good relationships with their partners as these are complex projects, requiring in-depth technical knowledge. This forms as a strong base on which a company like MYR can compete against competitors. These strong relationships create a small switching cost and keep their clients from leaving to competitors.
  • Barriers to Entry: While the industry is competitive, barriers to entry do exist, particularly for large, high-quality projects. To compete successfully at that level, a new entrant must have access to skilled labor and sophisticated equipment, as well as established relationships with utilities and other large clients.

However, MYR lacks strong moats from the aspects of high customer switching costs, strong network effect, and innovative products protected by patents/licenses.

The reliance on a few large customers, also makes the company susceptible to them, giving their clients strong pricing power over their projects. Also, the low margins make the company extra vulnerable to input price and project completion issues.

Overall, MYR’s moat is relatively weak due to the competitive nature of their industry, while still having some advantages because of their size, relationships, reputation, and specialized skills.

Risks to the Moat and Business Resilience

These are a few risks that could impact the moat of MYR.

  • Competition: As the industry is highly fragmented, there are many competitors all over the US. MYR’s profitability depends on their ability to compete with other players, while also maintaining efficiency. Strong competition can reduce prices and margins.
  • Economic Cyclicality: MYR is affected by economic fluctuations. If governments decide to reduce spending, or if energy consumption is reduced, MYR will be affected. Furthermore, their operations may be affected by recessions and other economic downturns.
  • Project Risks: MYR’s business involves project work, which can have several issues. Delays, cost overruns, or unforeseen issues can impact the timeline of operations and affect profits and revenue. A large number of these problems can come from unforeseen delays in permits, labor shortages, materials shortages, and changes to the terms of contracts.
  • Labor and Material Costs: Labor and material costs are a considerable part of the revenue. These costs are highly variable and can fluctuate sharply, resulting in significant changes in the gross margin of the company. Because of these costs are directly linked to commodity and labor prices, they are very difficult to control, meaning prices can be affected quickly.
  • Dependence on key clients: MYR is dependent on a limited number of large clients, and the loss of these relationships can affect future revenue projections. This provides them with greater influence and pricing power over the projects, reducing the moat of MYR.
  • Regulatory Changes: Changes in environmental, safety, or licensing regulations can potentially increase costs or disrupt projects.

Despite these risks, MYR demonstrates business resilience through its long-standing relationships with utilities, its ability to operate in diverse geographies, and its wide service offerings within its industry. Their project-based business model does make them more exposed to risk, but they can manage to be profitable over a longer period as a result of their relationships and scale of operations.

Understandability: 2 / 5

MYR Group’s business model is complex to understand fully, earning a rating of 2/5 for understandability. Here’s why:

  • Project-Based Nature: The company’s revenue is based on how many contracts they get and can complete. This is dependent on various factors, including the level of competition and the availability of labor and materials, etc., making it hard to gauge their future revenue.
  • Industry Complexity: The utility and infrastructure sector itself is highly complex and regulated, making it hard for the common retail investor to understand.
  • Accounting Complexity: The company’s financial statements can be hard to decipher because of multiple project contracts and several other operations, therefore making an analysis difficult.

Balance Sheet Health: 4 / 5

MYR Group has a fairly robust balance sheet, earning a rating of 4/5. Here’s a breakdown:

  • Adequate Liquidity: MYR Group generally maintains a high level of cash to ensure liquidity, which is critical in the project-based construction industry.
  • Debt Management: While not a debt-free company, MYR manages debt reasonably, by limiting their reliance on outside sources of capital and by using their cash reserves to pay off some loans. They have also not engaged in very big acquisitions that would increase the debt by a lot.
  • Reasonable Leverage: Their debt-to-equity ratios are very reasonable.
  • Working Capital Management: As mentioned above, they are a working-capital intensive business. They need to manage these levels closely so that they can achieve smooth operations.

However, they have to carefully manage costs and debt, given their relatively low margins, as otherwise, they would become extremely exposed to any negative changes in the business or the industry.

In summary, while MYR Group possesses some advantages and resilience, their moat is not particularly high. Their complex operations and the highly competitive nature of their industry makes their business difficult to analyse fully, and although their balance sheet is pretty good, it could be better. They are a company that can be profitable in a positive economic environment, and by focusing on a more streamlined project execution and improving margins they can continue to produce good results for their investors.