Foster Wheeler: A Few Problems, Lots of Misinformation

Feb.25.09 | About: Amec Foster (AMFW)

First on a non-GAAP basis (i.e. excluding one-time items), Foster Wheeler (FWLT) beat the analysts’ Q4 estimates for EPS ($1.03 vs expected $.95). It missed on sales $1.64B to $1.78B. This was a little disturbing, but it was not surprising. The speed of project completion (or contracted item completion) has apparently slowed down somewhat due to the economic times.

A Zacks analyst pointed to fact that the backlog for the quarter (Q4) shrank from $7.3B to $5.5B as extremely disturbing. He touted all this as the end of the “boom” for FWLT. While I admit FWLT is definitely seeing harder times, I disagree with this analysis, and I believe the data bears this out.

According to the conference call, $700M of that backlog decrease was due to currency exchange rate changes. This may be a temporary negative for FWLT. However, it does not indicate a major slowing of the business, which is a different kettle of fish altogether. Furthermore, FWLT booked $1.6B in revenues, but recorded only $580M in new works (and took away from the recorded backlog). This too sounded terrible at first. However, FWLT CEO Ray Milchovich (in the conference call) made the point that many of the big contracts were being released piece meal in this harsher environment. As an example he cited the E&C backlog in man hours. At the end of 2007 the backlog was 13.4M man hours. At the end of 2008 the backlog was 12.6M man hours. He then quickly pointed to two projects that FWLT expects to proceed. He noted he expected they would. Again he alluded to the extra delays that have been present this year. If the abnormal delays on those two projects had not occurred, the backlog in man hours would be 14.9M at the end of 2008 (or clear growth in the E&C business). Since Jacobs Engineering (NYSE:JEC) recently reported growing their backlog, I do not find this hard to believe. This would also have affected the “new works” figure of $580M cited above.

For the Global Power Group, the new orders and backlog did decline sequentially. The company is taking actions to “right size” this area. The company apparently thinks that the demand in this area is mostly a factor of the economic times and the decline in the natural gas prices. FWLT does not think there is a long term down trend in this area. FWLT pointed out that their boilers can not only burn coal, but can burn bio-gas in carbon neutral mode as well. Plu, the boilers can burn a number of fuels other than coal. In addition, FWLT boilers can be configured to burn very cleanly and efficiently. Longer term, FWLT continues to be bullish about this segment of the market. Since many oil exploration companies have cut back on their CAPEX for 2009, I find this extremely easy to believe. I no more believe that FWLT’s long term Power business is in a long term down trend than I believe the oil companies will continue their lower 2009 oil exploration activities for long. There is still a huge need long term for growth in the energy area. FWLT will have to service some of this growth.

There was also skepticism about the LNG market. FWLT discounted this skepticism. FWLT said the demand for LNG projects remains strong because customers know it takes several years to complete these projects. Since the price of natural gas is very cheap at the moment. That to would seem to be a factor which would mitigate for strength in the LNG market (i.e. it would still be a “cheap” form of energy even after transport).

The Zacks analyst, John Simon, cited the stock buy backs as another sign of FWLT’s decline. The number of shares used to calculate the EPS was down 8% in 2008 vs. 2007 due to stock buy backs. Still the non-GAAP EPS were $1.03 in Q4 2008 vs. $.56 in Q4 2007. This is still good growth, even considering 8% fewer shares. Furthermore, the buybacks indicate that management is looking out for the investor. The buy backs have ceased for the near term. FWLT wants to maintain a healthy cash position. Then it will be in good position to pay its bills and to acquire new companies. FWLT specifically mentioned it was near the acquisition of one company. FWLT is considering the acquisition of two other companies.

FWLT specifically mentioned 8 mega projects (greater than 1,000,000 man hours) that it had hoped would contribute to 2009 work.

  1. Ecopetrol (NYSE:EC) in Colombia is a major refinery upgrade. Only the FEED part of it has been booked in Q4 2008 (about 1/3 of the project). The rest is expected to be booked in 2009, when the final investment decision is made after the FEED.
  2. A petrochemical complex in the Middle East. FWLT signed the complex for the FEED. FWLT received a limited notice to proceed. FWLT expects there will be other notices to proceed as the project moves forward. FWLT expects to book the project in Q1 2009.
  3. A refinery project in the Far East. It is an EPC type contract. The negotiations are ongoing. FWLT expects the final decision on this project in the first quarter of 2009.
  4. A refinery project in the Far East. FWLT signed the contract for this project. As is typical with this client, the project is proceeding through limited releases of work. FWLT has already booked the first release. FWLT expects to book additional releases through 2009.
  5. A petrochemical project in the Middle East. FWLT has been verbally notified that the project has been awarded to FWLT. The project is taking longer than expected to be declared.
  6. A project in the Far East. This project is in the bidding phase. The indication is that the project is proceeding.
  7. A refining project in Far East. FWLT has already lost the FEED portion of this contract. However, the project has been split. FWLT still has the opportunity to win the EPCN portion of the contract.
  8. A refinery project in the Middle East. This project was lost on contract.

FWLT also mentioned the possibility of one other large contract that could impact 2009 EBITDA and two other large contracts that were being negotiated for 2010. FWLT cited the amount of current activity as extremely favorable compared to this time last year.

Overall my impression is that FWLT is having some problems in its Global Power area. It is doing well in E&C. It is doing well in LNG. It is managing its Global Power situation well. It expects the Global Power business to increase as the economic situation improves. It does not sound like it foresees a long term end to its “Boom” as the Zacks analyst, John Simon, put it. The comments of the various analysts in on the conference call did not make me think that they believed in the “doom and gloom” scenario the Zacks analyst put forward.

Certainly his analysis seems to have been slanted to a view he wanted to put forward. For example using $1.6B and $1.8B figures for revenue instead of $1.64B and $1.78B figures. He completely neglected to mention the $700M loss of backlog due to currency issues alone. He neglected to mention that the Q4 bookings could be viewed completely differently if you included a couple minorly delayed items. I tend to think that the strength showed by JEC (increased backlog by $1B) further tends to belie Mr. Simon’s assertion of “doom and gloom” for FWLT. Instead this is just another company with a great P/E and FPE that is having some hiccups due to the economy.

I have not seen these other companies' stocks tank when they beat EPS, even if there is an 8% miss on revenues. I tend to believe there is a little weakness. I tend to believe it is looking worse due to the inevitable longer delays in this kind of economic environment. I believe the margins will get hurt in the coming year, but they should still be healthy. I believe most of this had already been baked into the former stock price. Therefore, I tend to believe the stock will recover its most recently lost value quickly, as a more sanguine version of the news gets out. In fact, if the market takes off, FWLT seems likely to go right with it.

Disclosure: long FWLT