Feeling Brave? Try Foster Wheeler

With all the headlines focusing on the finacial crisis and the bailout plan, the markets have been a turbulent place, to say the least. It is common to see stocks up or down 10% on a given day. Up when the bailout is going to pass and the economy is going to be O.K., and down when the media tells us that we are going into a great depression.

One stock that hasn't escaped the brutal selloff is Foster Wheeler (FWLT). This is a company with a huge backlog of work that exceeds the market cap of the company which, according to the CEO, is not in danger of being cancelled unless oil goes under $70, and even then isn't a sure thing to be cancelled.

They have a forward P.E under 8 and are expected to grow earnings at 18% for the next five years. This gives them a PEG of .48. Analysts have them earning $4.24 next year, which if they were to miss by $1 would still give them a P.E of 10 and a PEG under 1.0. And let's not forget the buyback that was just announced of 15% of the shares that will help offset any weakness in earnings. On November 5 we will hear what the company has to say about the future, but judging from GE's mid-quarter update saying how strong their infrastructure group was, I am expecting good things.

All of these facts lead me to believe that the market overreacted to the downside on this stock, and while there may be more downside to come as more funds face redemptions and oil continues to fall, this is a great time to go against the crowd and start a position in FWLT, taking advantage of any further weakness to average down. This isn't for the faint of heart, but those willing to take a gamble could be rewarded in the future.

Disclosure: Author holds a long position in FWLT

Comments

[epeon:]

The whole engineering sector is in a simular situation. KBR, FLR, and JEC are in almost precisely the same place. They have good cashflow, huge backloads. Do you know that these companies will not do fixed-bid contracts anymore? Everything is cost plus. Their risks are essentially nothing. So, I think they will do quite well over the next five years.

2008 Oct 02 01:40 PM

[22thoroughbred:]

Infrastructure stocks are not trading on fundamentals or prospects, they are being sold like the agri-business stocks, hedge fund liquidations, when they NEED to sell price, PE, backlog doesn't matter, nobody of size will buy into that selling, but when the selling is done, really big snap back. That's why the time to buy is when it just plain hurts. Buy 1/3rd posn now, 1/3rd posn down another 3-4 and the last 1/3rd down 3-4 from there, and wait till it hits $50 again in 12 months, that's how to make money.

2008 Oct 02 04:23 PM

[Kinnick:]

given FWLT another 15%. The above comments are exactly correct: throw out all that you know about picking stocks. These great companies are getting pummeled like the commodity stocks due to hedge funds and are trading down as if we're in the crux of the next depression already. Will be above 50 by next summer, if you can endure some pain until then.

2008 Oct 02 08:15 PM

[Urbane Gori...:]

Right Kinnick... Have some patience. There doesn't seem to be any real reason to expect an upturn in teh near future, and if there is, buy when they start moving up. And P/E ratios seem to be worthless right now. Check Debt/Equity and cashflow.

jegan ;-)

2008 Oct 03 10:58 PM

[einstein p ...:]

Throw everything you know out the door. We are in uncharted territory.

Trading this market is impossible. You'd have more fun at the track --- and maybe better odds.

Companies are holding back on the repurchase plans, facing the same obstacles as investors. They keep going down, which does not put a bottom under these stocks. With credit as tight as it is, companies like JOYG, POT, FWLT, and others may be holding off buying back stock and hording capital. It's the right thing to do --- unless the stocks get cheap enough that you can buy back shares and have enough excess capital to run the company.

These companies will resume repurchasing shares when they see a bottom --- or at least some light at the end of the bear cave. As bullish as I have been on commodities, it may be wise to do the same.

2008 Oct 06 09:57 PM

[einstein p ...:]

I'm feeling brave.

Time to wade in to the muck and plan for the future. At 27, you have more upside than down --- provided you have the cash and the ability to wait this out.

You have both sides of the ticket on your side. Interest rates are coming down. This type of infrastructure is the growth engine of the future.

2008 Oct 08 10:41 PM