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Infrastructure Outlook Is Bright

Posted: Jul 15, 2009 11:08 AM by Greg Sushinsky

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

Engineering and infrastructure company The Shaw Group (NYSE: SGR) reported quarterly earnings slightly below expectations last week, and continued to give a cautious outlook for the remainder of the year. Shaw and other large infrastructure construction firms are a window into how the building of large industrial projects, such as power plants, oil refineries and other massive works, is proceeding in the economy.

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A Look at Shaw Right Now
Shaw Group reported 57 cents earnings per diluted share, excluding charges, for the quarter ended May 31, versus 67 cents per diluted share for last year's same quarter. Revenue remained flat at $1.8 billion, while the company's outlook for the full-year earnings is $2 per share, down from $2.10-2.30, on expected revenue of $7.1 billion to $7.3 billion. The company has a backlog of $22.9 billion in projects, of which $5.3 billion, or 23%, is due to be realized this year. The stock market has been lukewarm on Shaw and other infrastructure stocks due to lackluster spending for large construction projects.

Engineering and Infrastructure Outlook
There are three main currents running through the engineering and infrastructure segment. One is that the earnings backlog indicates that investors will have to wait awhile for increased business to reach these companies' top and bottom lines. The second current is that the oil service and chemical industry is weak, while the third current, public infrastructure highway, bridges and water projects should be more robust, although many of these works are in the projected stage.

The Market's View
Part of the market's view on the infrastructure stocks has to do with their time line for an upsurge in business, as evidenced by the backlog orders for Shaw. On the other hand, McDermott International, Inc. (NYSE: MDR), another infrastructure company heavily involved in oil service and refinery construction, was cited by Jefferies as an excellent long-term investment. The key here, though, is to look two to five years out. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

Shaw Group stock, for example, like its engineering brethren, is trading at $23.69, down from its 52-week high of $64.66, but up from its low of $11.47, probably due to investor concerns over near-term earnings growth. While Shaw's bookings for large projects beyond this year are encouraging, they are joined by other engineering companies in this. Fluor Corp.(NYSE: FLR) recently landed a project from the U.S. government for a $1.5 billion project for the U.S. Army troops in Afghanistan, with the potential for the project to grow to $7.5 billion over the next five years. URS Corp. (NYSE: URS), a widely diversified engineering firm, also does military projects and has been one of the few companies in this sector to show earnings increases.

Foster-Wheeler International (Nasdaq: FWLT), which does a lot of oil service and gas industry projects, has seen its stock beaten down, yet it has a healthy load of cash and great diversification via its international exposure. This global diversification factor should work in favor of most of the infrastructure companies' whose far-flung projects give them a solid international element as investments.

The Bottom Line: Buy Now, Later or Not at All?
The future for Shaw Group and other major infrastructure and engineering stocks remains bright, longer term. The amount of pent-up demand for necessary infrastructure projects alone, neglected for nearly fifty years in the U.S., is staggering. Along with that, as the economy brightens and there is increases in oil service and other elements of Shaw's workload, revenue and earnings will start to re-grow. Shaw is also heavily involved in power plant construction, including nuclear, which may have a new life as the world works through the carbon emissions question going forward. Shaw and these other stocks appear as bargains now which may not pay off much in the next couple of years, but will likely pay off very handsomely beyond then. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer.)

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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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