The market impressively shrugged off a disappointing ADP jobs report for most of yesterday's session, staying in positive territory until late in the day. Unfortunately, the trend to sell off into the close reared its ugly head yet again and the market finished close to its lows. All three major indexes were down approximately one percent by the end of the day.
It was an ugly close to an ugly quarter. The worst second quarter since 2002. The support level of 1040 on the S&P was finally successfully breached after numerous tries over the last several months. This combined with the critical monthly jobs report Friday that is likely to come in at less than the consensus of 110K in private sector job growth, does not bode well for the action for the rest of the week. Given the continuous tumult in Europe, the slowdown in China, and the long holiday weekend; there is a good possibility that we will continue to sell off into Friday’s close. The next good support level is in the 975 to 980 region on the S&P.
I continue to advocate to stay small and to stay defensive. Again stick to those equities with pristine balance sheets, rock solid business models, reasonable valuations, and decent dividend yields. Most of the stocks that we are finding using these criteria are in the large cap blue chip area (VOD, PFE, JNJ, XOM, AEP, MSFT, T, etc).
Although it does not carry a dividend, the following company does meet all the other criteria. The next selection we would like to highlight is Foster Wheeler (FWLT).
Overview: Foster Wheeler AG, together with its subsidiaries, provides construction and engineering services to the oil and gas, oil refining, chemical/petrochemical, pharmaceutical, environmental, power generation, and power plant operation and maintenance industries worldwide. The company operates through two groups, Global Engineering and Construction Group (Global E&C Group), and Global Power Group. The Global E&C Group designs, engineers, and constructs onshore and offshore upstream oil and gas processing facilities; natural gas liquefaction facilities and receiving terminals; gas-to-liquids facilities; oil refining; chemical and petrochemical; pharmaceutical and biotechnology facilities; power generation and distribution facilities; and gasification facilities. It also owns refinery residue upgrading technologies and a hydrogen production process used in oil refineries and petrochemical plants.
Prognosis: The stock price has fallen significantly from the $35 a share level earlier in the year. A lot of the damage was caused by the fallout from the Gulf oil spill, although they have no liability in the catastrophe, which hit many companies in the Energy sector. It is also being hurt temporarily as it transitions to a different CEO.
Valuation: Foster Wheeler is selling for approximately 9.5 times this year’s consensus earnings and 8 times 2011’s projected earnings. It is selling at the low end of its five year range based on Price/Earnings, Price/Sales, and Price/Cash Flow. It has approximately $5 per share in net cash on the balance sheet.
Catalysts: There are several factors that we believe should provide support for a higher stock price in the near and medium term:
- The overhang from the Gulf oil spill should recede once the relief wells successfully plug the leak, hopefully by August.
- The backlog of Oil/Gas and Power projects has probably bottomed, provided oil stays above $60 a barrel
- The management transition should be completed shortly
Recommendation(s): We believe the stock should be trading at a more reasonable rate of approximately 12-14 times this year’s projected earnings of $2.20. Given the growth in revenues and earnings expected to take place over the next 12 to 18 months; our target Price is $26-$30, up from the current price of $21.05.