As the call for infrastructure improvement projects becomes louder and louder and a new administration comes to the White House I find it interesting that shares of the very companies providing such services are being sold off in the marketplace. I’ll attribute it to a number of things, not least of which is the forced selling by big hedge funds which continue to see redemptions and a crisis of confidence amongst buyers.
The nervousness is not without reason. The major engineering and construction firms are seeing their backlogs shrink due to the credit crisis and lower oil prices that creates caution on new projects. Current share prices may be warranted after all.
As a contrarian value investor though, infrastructure stocks have been beaten down so far they may be a bargain at the moment. Here are some names to consider:
Jacobs Engineering Group, Inc. (JEC) provides technical, professional, and construction services to industrial, commercial and governmental customers worldwide. The company designs and builds modern process plants for customers in the oil and gas refining, food and consumer products, and basic resources industries; infrastructure projects including highways, roads and bridges and water and wastewater treatment plants; technology and manufacturing facilities for clients in the aerospace, defense, semiconductor, automotive, and electronics industries.
Recently analysts have lowered earnings estimates due to the credit crisis constraining capital expenditures and the prospect of project delays. Nonresidential contractors such as Jacobs are likely to be hit as “the worst is yet to come” according to the Goldman analyst who cut his earnings estimate for 2009 to $3.85 per share from $3.95 per share.
In addition, Jacob’s has exposure to Canadian oil sands work and U.S. refinery spending makes it susceptible to further declines in oil prices. Still, at today’s price the shares trade for just 8.5 times ’09 estimates and the company has a terrific balance sheet. Jacobs is sure to capture some forthcoming U.S. government infrastructure spending and has a 23 percent year-over-year increase in the value of its backorders.
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Foster Wheeler Ltd. (FWLT) and its subsidiaries provide engineering and construction services to the oil and gas, oil refining, chemical/petrochemical, pharmaceutical, environmental, power generation, and power plant operation and maintenance sectors worldwide. Shares fell hard recently as analysts cut their price targets and earnings estimates on concerns over poor new bookings and the need to win several large contracts in the next couple of quarters.
One of the analysts said he was concerned about the company’s exposure to power projects because he’s concerned oil and gas projects will be delayed due to the weakening economy. Another analyst cut his earnings estimate to $3.33 per share but at that level the shares trade for about 7 times earnings.
FWLT shares trade for just 64 percent of sales and have a debt-to-equity ratio of just .25. In addition, there is about $9 per share of cash and cash equivalents on the balance sheet and the company bought back 9.2 million shares in October. Upside is big and risk is small in my opinion.
Fluor Corp. (FLR) provides engineering, procurement, construction management and project management services worldwide. It serves the Oil and Gas segment with services to upstream oil and gas production and downstream refining, and petrochemicals industries. The company’s Industrial and Infrastructure segment supports the transportation, mining, life sciences, telecommunications, manufacturing, microelectronic and healthcare sectors with respect to new construction and refurbishment. Service offerings include roads, highways, bridges, rail and airports.
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The Government segment provides engineering, construction, contingency response, management, and operations services to the U.S. government focusing on the Department of Energy, Department of Defense and Department of Homeland Security.
Shares sold off yesterday but rebounded in after-hours trading as the company beat Q3 expectations by $0.10 per share by announcing earnings of $1.01 per share and increasing guidance for FY ’08 to $3.70 to $3.80 per share compared to consensus estimates of $3.52 per share. FLR guided in-line for fiscal ’09 with expectations in the $3.90 to $4.20 per share level vs. $4.01 per share consensus.
The company did acknowledge that the weakening economy could moderate the demand for large capital expansion projects. However backlog stands at $36.5 billion, up 31 percent from a year ago and the company believes its strong balance sheet and industrial and geographic diversity will allow it to continue to grow in 2009.
While it is scary to be an investor there are some encouraging signs for the infrastructure space. Democrats in office should translate to big spending on big projects. Some of the stocks listed may go lower, but these companies have great balance sheets, strong customer bases and large backlogs.
Best of all, they trade at significant discounts to where they traded at just a few months ago. These are great companies that do important work and the optimists shouldn’t look a gift horse in the mouth for too long.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.
