Wednesday, December 3, 2008

Back of Envelope Look at Infrastructure

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Back in the old days, we used to look at individual companies, sectors... analyze industry data points, do comparative valuation analysis, read earnings reports with great interest, etc etc. Those were good times. Now, we wait every day for 3 PM, play a bunch of ETFs for a 1 hour trade, and then try to predict what ETFs would be best suited for the next 2-48 hours based on charts. That's "investing" today.

Just for old times sake I thought I'd look at a group that I (still) like for the long run - it seems almost every world government is going to fix their issues with infrastructure projects. The problem is the consensus that project after project will get cancelled due to low oil prices and lack of credit. It really does not matter what side of the chalk line you are on - when these stocks rally people will cling to one side of the argument and when the stocks sell off, they will cling to the other. This is called constructing a story based on price action rather on any predictive ability. This group of stocks has actually rallied pretty well the past week based on the Obama dream for new highway projects, rebuild electrical grid, and unicorns galloping across open plains of ... ok well, toll roads. All by summer 2009 of course. Perception is reality.

What I've done below is a quick and dirty 'back of envelope' look at the main infrastructure stocks we follow - I've put the stocks into 2 groups: Premium Franchises and Everyone Else. I never knew a Premium Franchise would we worth the high price of 7x earnings but it is nowadays. In the former group are Jacobs Engineering Group (JEC), Fluor (FLR) and for some odd reason Shaw Group (SGR) - this is based on their 2009 multiple ex cash. That is, excluding the cash (net of debt) on their balance sheet, what the remaining business is being valued at. These stalwarts are now valued at 7-9 2009 estimates ex cash.

In the latter group are the rest of the motley group, falling mostly around 3x ex cash. As you can see 4 of the 7 names have 25% or more of their market cap in cash, with KBR (KBR) at a staggering 54%. Each of these companies have unique areas they play in - i.e. Shaw Group (SGR) has heavy nuclear exposure, McDermott (MDR) coal so they are not completely equal comparisons. With that said, Fluor and Jacobs have carried a premium to the group for a long while now and continue to do so. Of the laggards, KBR has the issue of a large Iraq exposure so any thoughts of a wind down of the war there could be seen as a threat to earnings potential.

The last two holdouts of this group that I held were Foster Wheeler (FWLT) and Fluor (FLR) and based on these metrics I still like those two most although KBR is compelling. McDermott (MDR) has had a lot of execution problems the past year, and Chicago Bridge & Iron (CBI) is a story unto itself. Shaw and Chicago Bridge are the only two without meaningful net cash (Shaw is actually net negative). [I used Yahoo Finance to pull the statistics so don't get all SEC filings detail oriented on me - this is simply a back of envelope exercize)

(click to enlarge)

So these are fun pictures to look at and an excuse for me to break out my Microsoft Excel for the first time in a long time. But since this is a legalized gambling hall (hey yo! It's 3 PM in 8 hours - you ready to "invest" for an hour??) and company fundamentals mean nothing, that is all this is - an exercise in futility. When the market is up - they all go up, as they are all one company in the market's eyes - and vice versa. Looking any deeper than that, is simply a waste of our time in the casino. To whit, bring on the sample charts - erase the names in the left corner and they all are essentially the same.

2 Premium Names - nearly identical to each other



2 Everyone Elses - nearly identical to each other


If credit were available we'd be expecting a massive wave of M&A activity but right now, it just seems everyone sits on their hand. For $22 Billion you could own all 7, roll it into ChicagoFluorEngineeringWheeler Group (INFR) and lock up most of this talent (human capital) and set your own price on projects - well, at least the 98.8% that are not going to be cancelled - I meant the Obama projects. The market already treats them as the same company so why are we bothering with 7 CEOs, 7 auditing committees, 7 ticker symbols, 7 corporate headquarters, etc? Too bad those fools in private equity were too busy the past 3-4 years buying up retailers and other cyclical industrials, and saddling them with huge debts as they extract their blood, or else they could jump in here. Last October when we looked [Oct 7 2007: Sector Focus - Infrastructure] just buying Fluor and McDermott would of set you back $28 Billion. Blue Light Special in Infra.

*Please note I did not include URS (URS) due to roughly $1B in debt

No positions but one day....

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