Analyzing Major Engineering and Construction Firms Using Relative Valuation

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Includes: ACM, CBI, FLR, JEC, URS
by: The Ethical Investor

The recent economic downturn had a major impact on the Engineering and Construction (E&C) industry with the cancellation and postponement of several projects. Things appear to be improving for the industry with several new projects on the horizon. I am optimistic about the infusion of fresh capital in highways and rail projects, power generation projects, and oil and gas exploration projects.

The performance of E&C sector is a lagging indicator of the economy. Investing in this sector will probably not yield significant returns in the short term, but should provide handsome returns in the long term. As a contrarian investor, I find this sector fairly attractive for investments and am therefore in the lookout for attractively priced strong companies in this sector.

This article presents the relative analysis results conducted for five major E&C companies, namely Jacobs (NYSE:JEC), URS (NYSE:URS), Fluor (NYSE:FLR), AECOM (NYSE:ACM), and Chicago Bridge & Iron (NYSE:CBI).

The financial and fundamental information for the companies mentioned above are shown in table that follows:

Relative valuation (RV) was performed by 3 different methods.

1) RV based on historical ratios of the company alone

2) RV based on historical ratios of the company and its peers

3) RV based on historical ratios of the company and S&P 500

It should be noted that the historical data was taken in calculating the estimates used in this analysis. Adjustments were made to account for outliers present in the dataset. The TTM EPS, revenues, and the book values for the five companies are shown the table that follows:

Relative valuation based on historical ratios of the company alone

In this analysis, the current P/E, P/S and P/B ratios were compared to the historical ratios of the individual companies and an estimate for the respective ratios was obtained. Fair value was calculated by applying these estimates to TTM EPS, sales per share and book value.

Relative valuation based on historical ratios of the company and peers

In this analysis, the current P/E, P/S and P/B ratios were compared to the peer companies and an estimate for the respective ratios was obtained. Fair value was calculated by applying these estimates to TTM EPS, sales per share and book value.

Relative valuation based on historical ratios of the company and S&P 500

In this analysis, P/E ratios of the five companies were compared to the P/E ratios of the S&P 500 index. Based on historic averages, multiples were generated for the analyzed companies using the S&P 500 index as a base.

Summary:

Taking the average of the fair values obtained from the previous sections, fair value for the five companies is calculated. The results are shown in the table that follows.

Based on the performed valuation analysis, URS, FLR and AECOM are undervalued, JEC is fairly valued and CBI is overvalued. Of the five companies, URS makes a good candidate for investment at these levels.

While Chicago Bridge & Iron is currently overvalued, the company has several growth opportunities in developing markets (which are expected to outperform the growth in developed markets in the short term) and is my preferred choice as a long term investment. I would ideally like to initiate a position in CBI below $22 a share. It should be noted that the stock has increased in value by approximately 30% in the past 6 months and a correction is warranted in my opinion.

(Kindly use this article for information purposes only. Please consult your investment advisor before making any investment decision.)

Disclosure: No positions

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