Why Tutor Perini Shares Could Double

| About: Tutor Perini (TPC)

Tutor Perini Corporation (NYSE:TPC) is a major construction firm that many investors may not be familiar with, however, chances are you have either heard of, or visited some of the major projects this company has helped to construct. Tutor Perini is a leader in casino, hotel and infrastructure projects, some of which have included: City Center in Las Vegas, Palms Casino Resort in Las Vegas, the Long Island Expressway, the San Jose Arena, McCarran Airport in Las Vegas, the San Rafael Bridge, the Santa Monica Hospital and many more.

I have been following a number of stocks in the construction and engineering sector, and after a recent drop over weaker than expected earnings, Tutor Perini shares look like an absolute bargain for long-term investors. By taking a closer look at this company as well as a number of competitors, it becomes easy to see why this stock looks so appealing, and undervalued at current levels.

Back in 2007, when the economy was in better shape, Tutor Perini posted earnings of $3.54 per share, and the stock traded for over $70. The company had weak results in 2008, which was during the financial crisis, but earnings per share rebounded to $2.79 in 2009. Based on those results, this company has a recent history of earning about $3 per share, when business is solid. However, the stock is now only trading for about $13.50 per share.

Many investors realize that the construction business is highly cyclical and the best time to buy a stock in this sector is when it is at or close to the bottom of the cycle. Recent economic data has shown that the U.S. economy is improving and that is a potentially strong indicator that the worst is over for the construction industry. Tutor Perini has recently seen a sharp jump in business and it now has contract backlog worth $6.1 billion, which is up from $4.3 billion a year ago. This company has just over $3 billion per year in revenues, so that backlog is about two years worth of revenues. The company recently was awarded a $55 million contract for a project in Iraq.

This stock has been in a solid uptrend since December, but it dropped from about $17 to $13.50 per share, after the company reported earnings of 50 cents per share for the fourth quarter of 2011, and full-year profits of $1.80 per share. This was below full-year results for 2010, which came in at $2.13 per share. However, investors who sold the stock on this news seem to be short-sighted, especially when considering that the company offered guidance for 2012 earnings to be in the range of $2.10 to $2.30 per share. At just $13.50 per share, this stock now trades for about 6.5 times earnings, and it also trades well below book value of $29.19 per share.

When you compare this with some of the other publicly-traded firms in this sector, the level of undervaluation is even more noticeable. Also, a number of homebuilding stocks (these are basically construction companies also) are trading for much higher valuations, even though many are barely profitable or still losing money, while Tutor Perini is solidly profitable, this is another indicator of undervaluation.

Historically, this company has been able to earn about $3 per share. It has also had much higher price to earnings multiples- about 20 near the peak. If you take $3 per share in earnings power, and put a below-market multiple of 10 on these shares, the stock has a solid shot at doubling in the next couple of years to about $30 per share. I believe this stock will quickly bounce back from the recent drop and resume the uptrend in the coming days and weeks. Taking a closer look at a few related stocks below builds a very strong case for a higher valuation in the future for Tutor Perini.

Here are some key points for Tutor Perini:

  • Current share price: $13.50
  • The 52 week range is $10.08 to $26.87
  • Earnings estimates for 2012: $2.10 to $2.30 per share, (company guidance)
  • Earnings estimates for 2013: $2.63 per share
  • Annual dividend: none
  • Price to earnings ratio: about 6.5

Below are some related stocks in the construction and engineering sector, which are trading at much higher valuations. Some of these companies are larger in size and therefore more well-known to the investor community. Tutor Perini's low stock price and smaller size, could make it an attractive takeover target for a larger company. It has a solid balance sheet and a number of mutual funds have taken a position in the company. The Dreman Value Management fund owns about 2.25 million Tutor Perini shares or around 5% of the company. AllianceBernstein owns about 2.67 million shares or around 5.7% of the company and several other top funds also own significant stakes.

Foster Wheeler (FWLT) is a leading construction and engineering company and is based in Switzerland. While this company is much larger and tends to focus on major infrastructure projects, it is operating in the same sector as Tutor Perini, it just has different specialties. This stock trades for about 13 times earnings, which is double the multiple of Tutor Perini shares. Furthermore, while this stock trades for $22.71 per share, it is expected to earn less than Tutor Perini shares in both 2012, and 2013.

Here are some key points for FWLT:

  • Current share price: $22.71
  • The 52 week range is $16.40 to $38.74
  • Earnings estimates for 2012: $1.81 per share
  • Earnings estimates for 2013: $2.23 per share
  • Annual dividend: none
  • Price to earnings ratio: about 13

Fluor Corporation (NYSE:FLR) is a construction and engineering company that focuses on very industrial projects like infrastructure, energy and other major projects. This is one of the largest companies in this sector. It trades at a price to earnings multiple that is more than double that of Tutor Perini. Since smaller companies are often able to grow at a faster rate, and because Tutor Perini is small enough to be a takeover target, it should probably be trading at a premium to other related stocks, instead of a discount. If Tutor Perini shares traded at the same earnings multiple that this stock enjoys, Tutor Perini shares would be close to $40.

Here are some key points for FLR:

  • Current share price: $58.13
  • The 52 week range is $44.16 to $75.46
  • Earnings estimates for 2012: $3.75 per share
  • Earnings estimates for 2013: $4.33 per share
  • Annual dividend: 64 cents per share which yields 1%
  • Price to earnings ratio: about 16.5

Toll Brothers Inc. (NYSE:TOL) is a major builder of luxury homes within the United States. Since homebuilders are basically construction companies, it seems appropriate to consider the valuation of this stock as it is related to the construction industry, and it is also highly dependent on economic cycles. This company is well-known to many investors because it is an industry leader and also because many investors have even bought a home from this company. However, when I can buy Tutor Perini shares for almost half the price, and enjoy earnings estimates that are about 7 times higher than that of Toll Brothers, it makes sense to sell this stock and buy Tutor Perini. Toll Brothers shares have a book value of $15.62 and it trades at a premium to that now, while Tutor Perini shares trade for about half of book value which is $29.19 per share. While Toll Brothers remains highly dependent on the weak housing market and has minimal earnings estimates, Tutor Perini is pumping out solid profits and it earned 50 cents in a single quarter, which is significantly more than Toll Brothers is expected to earn for all of 2012.

Here are some key points for TOL:

  • Current share price: $22.16
  • The 52 week range is $13.16 to $24.22
  • Earnings estimates for 2012: 33 cents per share
  • Earnings estimates for 2013: 74 cents per share
  • Annual dividend: none
  • Price to earnings ratio: about 60 for 2012 estimates, and about 31
  • times for 2013

KB Home, Inc. (NYSE:KBH) is another major homebuilder. Looking at the valuation of this company makes it easy to see what a bargain Tutor Perini is today. KB Home has been posting losses and that is expected to continue in 2012. Meanwhile, Tutor Perini has been profitable, and continues to make money. KB Home has a market capitalization of about $864 million, but due to a heavy debt load, the enterprise value is around $2 billion. It has annual revenues of about $1.3 billion. By contrast, Tutor Perini has a market capitalization of about $650 million and has a much smaller debt load, which takes the enterprise value to around $1.2 billion. Plus, Tutor Perini has about $3.2 billion in annual revenues, which is almost triple the annual revenues at KB Home. Finally, KB Home has a book value of about $5.74 and the stock sells for about double book, whereas Tutor Perini sells for less than half of book value. If I owned any KB Home shares, I would be selling them and buying Tutor Perini today. Not only is the valuation better at Tutor Perini, but the commercial construction industry is much healthier and does not have the lingering foreclosure issues that continue to hold back the homebuilding stocks.

Here are some key points for KBH:

  • Current share price: $10.73
  • The 52 week range is $5.02 to $13.67
  • Earnings estimates for 2012: a loss of 35 cents per share
  • Earnings estimates for 2013: a profit of 38 cents per share
  • Annual dividend: 25 cents which yields 2.2%
  • Price to earnings ratio: n/a for 2012 due to loss projections, about
  • 28 times for 2013

Tutor Perini shares were in an uptrend and the recent drop probably won't change that. This appears to be just a momentary pause before the rally resumes. The stock seems to be near the bottom of the cycle, and the only major downside risk appears to be if the economy has a double-dip recession, which does not look likely based on recent economic data. A couple other potential upside catalysts include a high level of short interest, which could cause a short squeeze. Also, the 50-day moving average is $15.23 and the 200-day moving average is $15.42, so the stock is very close to potentially making a "Golden Cross" formation which is when the 50 day moving average crosses above the 200-day average. The "Golden Cross" formation is followed by many investors who view it as confirmation of a major uptrend.

Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Disclosure: I am long TPC.