Why I'm Buying Foster Wheeler on Its Earnings Miss

| About: Amec Foster (AMFW)
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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