Monday, August 11, 2008

Global Infrastructure Night: Fluor (FLR), McDermott (MDR) Earnings

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Two of our infrastructure stocks reported tonight with mixed results - Fluor (FLR) continues to hit home runs, and is up 5% in after hours, while McDermott (MDR) did not report what the market liked and is down 5%. We have a slightly larger exposure to Fluor so net net, we'll break about even if the knee jerk reactions in tonight's after hours are any indication.

At $42 McDermott trades at 14x 2008 earning estimates, or about HALF of what Buffalo Wild Wings (BWLD) trades at (just trying to point out the wide discrepancies among totally disparate sectors). Fluor, along with Jacobs Engineering Group (JEC) always carries a high premium to the peer group and is at 24x 2008 earnings estimates. McDermott is now trading at levels seen a year ago; if the $40 level does not hold, technicals say we are heading to $35; if that does not hold we go back to early 2007 prices of $25... despite far higher earnings. If the $40 level DOES hold, then one could make a claim for a double bottom

As for Fluor (FLR) it is making a valient effort to hold the 200 day moving average ($77) but its peer group is being systematically dismembered since the world is heading for the abyss ... err the world ex the US of A which will thrive as it decouples from the rest of the world. The stock is trading near $80 in after hours but we have to keep a very tight leash on this because if the stock breaks down, it has potential to follow the death spiral of its peers. Despite the fundamentals I'll point out below (p.s. we don't use the f word around here anymore - I am only posting earnings reports for historical reference so we can look back at laugh at the era when they mattered)

1) McDermott earnings - revenue was a bit light, and earnings were in line. Power & Gas division continues to be the area of strength as it has been in the past. [Apr 29: McDermott Issues Warning] Backlog was flattish which is something we keep an eye on.
  • McDermott International, Inc. (NYSE:MDR - News) (McDermott or the Company) today reported net income of $177.5 million, or $0.77 per diluted share, for the 2008 second quarter, compared to net income of $149.4 million, or $0.66 per diluted share, for the corresponding period in 2007.
  • McDermotts revenues in the second quarter of 2008 were $1,792.6 million, an increase of 26.4 percent compared to $1,418.1 million in the corresponding period in 2007. The year-over-year improvement in Company revenues was primarily the result of a 50 percent increase from the Offshore Oil & Gas Construction segment.
2) Fluor earnings - beat on top line and bottom line and raised guidance (AGAIN) Fluor continues to earn its premium. Oil & Gas and Power segments are the lion's share of the growth - Government and Industrial were flattish, while Services grew nicely but is a small dollar amount.
  • Revenue rose by 37 percent to $5.8 billion, up from $4.2 billion in the second quarter of 2007, driven primarily by significant growth in the Oil & Gas and Power segments.
  • Net earnings rose 119 percent to $209 million, or $1.13 per diluted share, compared with $96 million or $0.53 per diluted share for the same period last year.
  • Operating profit for the quarter more than doubled to $392 million, compared with $187 million in the second quarter of 2007. All business segments contributed to this positive result by posting solid growth in profit over last year.
  • Second quarter results included a pre-tax gain of $79 million, or $0.26 per diluted share, from the sale of its joint venture interest in the Greater Gabbard Offshore Wind Farm project.
  • Operating margins rose to 6.8 percent, reflecting improvement in all segments. Excluding the Greater Gabbard sale, operating margins were 5.4 percent, up from 4.4 percent a year ago.
  • New project awards for the second quarter were a record $6.4 billion, compared to $5.8 billion in new awards a year ago. The quarter included a $1.8 billion award for the Greater Gabbard Offshore Wind Farm power project in the United Kingdom, which will provide carbon neutral, renewable electricity for more than 415,000 homes [May 16: Fluor as a Wind Play? $1.8 Billion Says Yes]
  • Consolidated backlog rose to another new company record of $33.0 billion, up 28 percent from a year ago and up $1.5 billion over the prior quarter. (the market says all/much/most of this will go away once oil goes back to where it was... last August)
Outlook
  • We are encouraged by the strength of our financial results to date, and see substantial opportunity for the balance of the year, said Chief Financial Officer Mike Steuert. As a result, we are increasing our full year guidance for Earnings Per Share to a range of $3.65 to $3.80 per share for 2008. This compares with previous guidance of $3.30 to $3.45 per share after adjusting for a two-for-one stock split that was effective on July 16, 2008.
[Jul 9: Fluor vs Perini - a Rising Tide does not lift all Boats]

Looking forward the question is to keep McDermott or not - while growth is nothing special, the valuation is quite low. I don't have a Value Line Survey in front of me but I could estimate it's somewhere near the lower end of its range. Considering I like the business prospects of Foster Wheeler (FWLT) slightly more than McDermott and it now trades at the same forward multiple (on faster growth) I'll probably exit McDermott. Both FWLT and MDR have similar destroyed charts. [Aug 6: Foster Wheeler - Solid Numbers]

I continue to be perplexed by Foster Wheeler - it posts similar growth numbers to Fluor but trades at 14x instead of 24x earnings. Backlog is not growing quite as fast, but why it trades at such a discount is a great question.

Long all stocks mentioned in fund; no personal position

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