Why I'm Buying Foster Wheeler on Its Earnings Miss

We took on the Foster Wheeler (FWLT) earnings miss, but I believe this is simply due to the Cramer-ites who expect the constant "beat and promise more" of classic momentum trading and who are jumping off the bandwagon in disappointment. Foster Wheeler and cohorts are in a business that is very lumpy - contracts are recognized in batches; it is a very different bidget than "produce widgets, sell widgets, repeat". So when something goes awry people panic and cry. In fact we saw an instant replay a few quarters ago last summer, the stock sold off huge, and created an enormous buying opportunity.

Now I did step on a mine as I took Foster Wheeler up from 1.8% to 3.5% allocation in the past week; and broke one of my own rules - don't build up a position going into earnings because the Street acts like a 3 year old brat if they don't get everything as they wish, but what's done is done. I in fact added another 100 shares on the 8%+ selloff. I wasn't online in the morning so I missed the low below $70, but I am adding in the $72s.

This $72 level is also the 50 day moving average so I see it as a sign of strength that the stock already rebounded back above this level. I could certainly be wrong and this is part of a bigger trend, but I heard the same doom and gloom the last time Foster Wheeler missed, and the stock went on to more than double from those oversold levels within a few months. I continue to watch this bursting backlog, and that is key #1 to my eyes. $4.6 BILLION in NEW ORDERS Booked this quarter alone - wow. That is almost equal to the entire amount of business they did in year 2007. Staggering.

This remains a company which grew 50% last year, and trades at roughly 20x forward earnings. While 50% won't continue, 25-30% future growth (over 2-4 years) seems very plausible.

• Foster Wheeler Ltd. said Tuesday fourth-quarter profit rose, but missed expectations due to the repeal of a tariff in Italy, contract issues with a client and fewer bonuses and incentives.
• The engineering and construction services company's profit rose nearly 24 percent to $78.1 million, or 54 cents per share, from $63.1 million, or 44 cents per share, a year earlier. Revenue jumped to $1.47 billion from $1.19 billion.
• Analysts expected profit of 76 cents per share on revenue of $1.42 billion, on average, according to a Thomson Financial poll.
• Full-year profit rose 50 percent to $393.9 million, or $2.72 per share, from $262 million, or $1.72 per share. Revenue climbed 46.1 percent to $5.11 billion from $3.5 billion.
• Milchovich noted, “We reported solid results for the fourth quarter of 2007. However, EBITDA was below the average of the first three quarters of the year because of reduced EBITDA in our Global Engineering and Construction (E&C) Group due to three factors. First, E&C experienced an $8.3 million negative impact due to the repeal of an Italian power price tariff, which had been enacted in the third quarter of 2007, as a result of a court ruling in the country. Second, we experienced fewer profit-enhancing opportunities such as bonuses and incentives during the quarter as compared to the early part of the year due to portfolio mix and contract timing. Finally, E&C took a $5 million reserve on one reimbursable contract due to issues with the client over project scope growth. We’re hopeful that this matter will be favorably resolved in future periods but felt that it was appropriate to reserve for it at this time.”
• Milchovich added, “As we look at 2008, we continue to be very positive about the markets that both our businesses serve and about our position as we enter the year. In our E&C Group, consistent with what we’ve been saying for months, we expect meaningful organic growth and sustainable margins. We’re hopeful that this can be complemented by growth through strategic acquisitions during the year as well. In our Global Power Group, as we’ve previously stated, we remain confident that we will enjoy a material level of margin improvement and revenue growth during the year given our position and momentum entering 2008.”

Disclosure: Long Foster Wheeler in fund and personal account

Comments

[daroon]

Ooof. Technically speaking, that wasn't the time to be buying. Having made a lower low in mid January, and not having regained a higher high in February, I'd be concerned that FWLT may be gearing up to spending the year languishing.

2008 Feb 27 11:32 AM

[TraderMark]

I buy in layers (and sell in layers) - I bought more today near $64 and see downside to $62

If it breaks $62, then its a broken stock and I'll agree with you.

2008 Feb 27 12:08 PM

[todaysits]

This year has been such a roller coaster, it's hard to say what any stock will do...at least these guys have great numbers.
I also added some position at $69 and may add some more today. I only lose money if I sell, and I never sell until I lock in a profit :)

2008 Feb 27 01:17 PM

[VSD]

Looking at bookings may not be the best way to gauge the earnings. E&C is filled with litigation and fines and it like revenue comes in lumps. I would wait for a few more quarters before acting on this one.

2008 Feb 28 03:30 AM

[maher]

I agree with your sell methodology, and on adding to FWLT positions - I added at $70 and will add more this week-- Most people are impatient in aspects of their lives, and short-sighted and well...shallow; one who cannot afford a vision is doomed to chasing every light, snaking, and colorful ribbon in the sky.

2008 Feb 28 03:04 PM

[TraderMark]

VSD, I wish I could see the margins on said bookings. WHile I agree its not an end all be all, one thing I like in this sector as a whole is the visibility from the book of business. Many a technology company or various other sectors would hope for such a thing. But, it's not the only thing. I do like where their book of business is and *what* their book of business is, say versus a URS or PCR. Honestly I have FLR too and I thought both reports were impressive. FLR just made the current Q number.

I find people pick and choose favorites in this sector based on the most recent Q. A few quarters ago MDR was my top position and it was going like gangbusters. Then a "disappointing" quarter and you'd think the company was going out of business. People only have 90 day windows in this day and age -this is a very difficult business to have a 90 day window on... BUT FWLT might be an underperformer for next 90 days until their next earnings report when all will be forgotten. But I find their valuation compelling vs JEC, FLR etc. And again I like the Middle East exposure - hard to find companies who are exposed so fully to those petrol dollars.

If the market tanks I can see FWLT selling off, but if we have a stable market I can see it basing here in the low to mid $60s for a while, before remounting a new run. Unfortunately I am very wary of the market so we could see a reversion back below key technical levels, but I'd be even more interested at lower levels. Valuation on 2008 estimates (even if a bit high as the bears might argue) is becoming very compelling the lower we go.

2008 Feb 28 07:08 PM

[Stephen Rosenman]

Mark,
Please see my response to your comments in my article.
Thanks.

2008 Feb 28 08:57 PM

[User 160194]

FWLT has an enormous strength in its Reading office but some significant weaknesses in its E&C Division.Its Houston operation is very weak and weakness in the home of US International Oil and Gas is restrictive on client portfolio.It only has one product line and is dogged by poor quality.FWLT has masked 2007 financial results. In 2006 they were awarded a project in Saudi Arabia which they fronted but Hyundai executed.FWLT checked quality and took an $80m fee. Good opportunistic business but unfortunately that has let a competitor into a key market, not much future in that.That sort of opportunity probably arises once in a while, hence lumpy earnings.FWLT are now a reimbusible contractor,getting the resources to execute these projects should be interesting. Expect a bidding war on engineers salaries as FWLT and their competitors eat through their backlog. No wonder McDermott is preferred on a parallel blog, they are not a churner of manhours.

2008 Mar 04 06:00 PM

[User 50625]

Just curious as to how the author of this article knows that FWLT has 4.6 billion worth of contracts booked for Q1 2008?? In every press release announcing a new contract, the terms of that contract are not disclosed. The only thing mentioned is what quarter the contract will be booked into??

P.S. My cost basis is 70 and looking to buy more here.

2008 Mar 19 10:17 PM