The Wall Street Transcript recently interviewed Avram Fisher, an Analyst in the Equity Research Group of BMO Capital Markets Corp., covering the engineering and construction sector. Key excerpts follow:
TWST: What are the companies doing to offset what's going on from a business perspective at this point?
Mr. Fisher: While the breadth of the impact is wide, there are pockets of strength and there are defensive plays within the market. For example, companies like URS (NYSE:URS), Jacobs (NYSE:JEC), Tetra Tech (NASDAQ:TTEK), AECOM (NYSE:ACM), even to some extent Perini (PCR), have outsourced federal government exposure that isn't directly exposed to construction spending. Then there are end markets exposed to public infrastructure that would obviously benefit from a stimulus package. Finally, there are those companies exposed to non-US end markets where construction isn't driven so much by market demand but by strategic demand.
TWST: Let's touch on AECOM. What is it that investors don't understand?
Mr. Fisher: It's aligned with the peer group, but it trades at a discount to what I think is its closest comp, Tetra Tech, on both a p/e basis and on an EV to EBITDA basis. However, that discount is starting to shrink. It's roughly 20% on a p/e basis and 22% on an EV to EBITDA basis. That's down from 35%. So the discount has shrunk. I don't know what people are missing, but I don't think people appreciate how much margin expansion they can get by leveraging centralized cost structure across an international organization and how much leverage they can get from a fixed price engineering model and how much non-US exposure they have. I just don't think people understand the stock; they are also, to their credit in my opinion, not promotional at all. They're not out in front of investors every time they win a major award, which makes them fly slightly under the radar.
TWST: So part of the issue is they're non-promotional, so they don't get the attention?
Mr. Fisher: I think so, yes.
TWST: What's it going to take to narrow the gap even further, just consistent results?
Mr. Fisher: They're forecasting earnings growth next year of, I think, 13% to 20%. Tetra Tech, which is trading at a 20% premium, guided toward 8% to 16%. So at the mid-point of their range there is a difference in growth. One is above 15%, one is below 15%, and the one that's below is trading at a 20% premium. That doesn't make sense to me. And I don't think it makes sense to the capital markets and I think it will likely be erased.
TWST: What's keeping Perini back?
Mr. Fisher: For them to show growth they either need to wait for the gaming and lodging cycle to flow through their backlog or they need to book multibillion dollars worth of projects or equivalent projects that can generate the profit off of an assumed amount of work.
TWST: Do they have that capability?
Mr. Fisher: They've been saying that they can, that they can generate that work offshore in Dubai. I don't think the market really believes those opportunities are as robust as they used to be. And likely, it's just a matter of waiting, and when the comps get easier, then a handful of $200 million civil projects will make a difference, whereas right now they don't — or not enough of a difference.
TWST: A year ago, being heavily tied to Las Vegas was a good thing.
Mr. Fisher: Exactly, a year ago being tied to Las Vegas was a great thing. Who would have thought a year ago that being exposed to oil, gas and refining was a liability, not an asset?
TWST: Interesting how quickly things do change sometimes.
Mr. Fisher: They do. That's why I say the credit cycle killed construction.