Foster Wheeler, Fluor and URS: How Big is the Infrastructure Potential?

I've been spending a bit of time looking into the engineering and construction companies lately, as a play on the future demand for big-ticket infrastructure projects around the world.

This is a popular area in some ways -- most of the stocks are well off their recent peaks, but there is a ton of interest in them and a pretty solid consensus that a lot of potential exists for the sector, if not for every single company.

The scope of available companies to buy is pretty broad, too -- from big players like Fluor (FLR) to smaller guys like Foster Wheeler (FWLT) or URS (URS), the variety of midcap names to choose from means a lot of work for those interested in the sector (most of these guys are between 2-8 billion dollars in market cap).

A recent FT article focused on Foster Wheeler and compared them to Fluor -- it was pretty compelling. The chart below shows how a few of these companies have reacted to recent times, with FWLT at the top showing the most upside over the past year, but also much higher volatility, while FLR has been steadier and URS also quite volatile but less successful.

I started out with an interest in URS, with their extraordinarily broad book of business, from flight training services for the military to power plant scrubbing to bridge building. But to be truthful, I can't get my head around a business as complex as theirs -- they are heavily reliant on federal contracting at the moment, especially defense and homeland security stuff, and although the business looks good I didn't see that the impact on URS from basic power and energy infrastructure needs would be that great.

Fluor and Foster Wheeler came out of the first sort for me as the more appealing names -- FLR is hard to criticize but is also more highly valued than FWLT (forward PE of 22 versus 16), and it also has a broader business footprint. Fluor works in even more areas than URS does, with everything from building biotech plants to global staffing outsourcing to LNG gas-to-liquid projects. If I were to go with a broad bet on construction and energy and industrial infrastructure, FLR would be the first place I looked.

But for some reason, Foster Wheeler kept coming to mind. I think it's largely because I appreciate the relative simplicity of the business -- they really have significant expertise in only two major areas: power plants and refinery/production facilities for the oil and gas companies. They do work in other areas, too, including pharmaceutical plants, chemical plants, and similar big, dirty projects, but they're not spread quite as widely as URS or FLR.

Foster Wheeler also has the siren song of a turnaround -- but is it too late to catch this turnaround? That's what I'll have to spend some time pondering. The company is just turning profitable now, after very nearly entering bankruptcy a few years ago. They made all the mistakes that construction firms tend to make, especially in underbidding or taking on unproductive business when business wasn't so hot, but the level of suffering and their very near brush with bankruptcy gives me some confidence that they're focused on only making profitable bids going forward.

And if big capital projects in refineries and in power plants pick up around the world, I'm aware of no other company that is so specifically levered to these two businesses. I see demand for traditional power plants climbing in the US, which may be coming to mind largely because of the current heat wave that's taxing the power grid today, but I also see demand growing exponentially higher in the developing world for both these messy businesses.

The business climate is spectacular for all of these companies -- Foster Wheeler now has an order backlog that is nearly twice as large as their entire sales for 2005, and at least one analyst, James Thorne at MBT, believes they have enough business on the horizon to keep them busy for 15 years.

So is too much optimism priced into Foster Wheeler or their compatriots to make them compelling today? My gut feeling is no, but I need to look into this some more. Everyone from the Financial Times to Jim Cramer to SmartMoney has been calling attention to these companies following their recent downturn, so perhaps it's too late for any good returns in the short term -- but over the coming decade, I can't find a solid backing for the argument that the demand for cleaner, more efficient power generation and refining capacity is going to decline.

FWLT vs FLR vs. URS 6 month chart: