MasTec has been on fire lately. In the past six months alone, the company’s stock price has rocketed 61.5%, reaching $282.60 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy MasTec, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is MasTec Not Exciting?
We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons we avoid MTZ and a stock we'd rather own.
1. Low Gross Margin Reveals Weak Structural Profitability
All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products and commands stronger pricing power.
MasTec has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 12.7% gross margin over the last five years. Said differently, MasTec had to pay a chunky $87.26 to its suppliers for every $100 in revenue. 
2. Weak Operating Margin Could Cause Trouble
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
MasTec’s operating margin has been trending up over the last 12 months and averaged 3% over the last five years. The company’s higher efficiency is a breath of fresh air, but its suboptimal cost structure means it still sports lousy profitability for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, MasTec’s margin dropped by 5.8 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. MasTec’s free cash flow margin for the trailing 12 months was 2%.
Final Judgment
MasTec isn’t a terrible business, but it isn’t one of our picks. After the recent rally, the stock trades at 34.8× forward P/E (or $282.60 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. Let us point you toward the most entrenched endpoint security platform on the market.
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