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Engineering Firms Ready To Take Off?

Posted: Aug 18, 2009 09:57 AM by Greg Sushinsky

Tickers in this Article: JEC, MDR, SGR, FWLT, FLR

Fluor Corp. (NYSE: FLR), an engineering firm that builds large, complex industrial and infrastructure projects, announced reasonably positive second-quarter earnings last week. The real story of this and other engineering firms may loom in the coming quarters. Fluor and many of the other large engineering firms have remained profitable throughout the recession, and despite some bumps along the way, have the potential to do even better.

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Fluor Profits
Fluor earned $176.4 million or 93 cents per share in net income, compared with the second quarter last year of $217.9 million, or $1.12, of which 27 cents was a one-time gain on a sale. So an apples-to-apples comparison, without the one-time gain, means that earnings were up by eight cents a share. Despite the much talked about cancellation of the oil project contract with Kuwait, Fluor has maintained the money flow with big projects, and has garnered a ready backlog for more.

Engineering Space
When you look at Fluor and some of the other big engineering firms, other industries would die for the kind of numbers these companies are posting. That said, within the engineering group, most of the companies are giving conservative outlooks. Shaw Group (NYSE: SGR), another infrastructure heavy hitter, has cut its 2009 outlook, which disguises the vigorous business they've been doing throughout the recession. Foster Wheeler (NYSE: FWLT), another major firm, posted a decline in revenues and profits, but if you look behind the numbers, again, the apples-to-apples comparison without special gains was even.

Near-Term Developments
Though the Fluor earnings report cites such factors as the "volatile commodity" environment and the "uncertainty in government work" for future contracts, the name of the game for the engineering firms right now is in piling up future work. Fluor and the other firms mentioned do this successfully. Jacobs Engineering (NYSE: JEC), for example, has landed recent contracts as diverse as public sector project development in the UK as well as NASA work, including work on the space station. While these contracts will eventually bring in around $1 billion on their own, they are also part of the firm's $12 billion annual revenue. McDermott International (NSYE: MDR) has strengthened its emphasis on nuclear power projects, and re-organized its units in 2007 to provide a focus for more "non-carbon" power generation work.

Future for Fluor
Despite a downturn in the oil and gas industry, one of the large client segments for Fluor and the others, Fluor continues to book work in a wide range of areas. With productivity gains squeezed out of the same or even less amount of work, Fluor is one of the engineering firms that continues to operate efficiently through the recession. Its margins are up, its backlog stands at roughly $30 billion and continues to promote a healthy earnings outlook for the year. When some of the pent-up, unfulfilled infrastructure demands kick in for industry and from the government, beyond the military contracts, Fluor and the other firms stand to gain handily and could substantially boost their business in the coming years. Not being directly dependent on the consumer segment, Fluor and the others could be ready to take off. (For more, check out Industries That Thrive On Recession.)

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By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

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