Construction And Engineering Stocks Year In Review

By Greg Sushinsky | December 28, 2009 AAA

Construction and engineering businesses have felt the pain of this recession acutely, as cutbacks in large, capital-intensive, long-term projects have slowed revenues and earnings.

Some engineering companies have forward bookings of very large projects. However, it is not always best to evaluate their revenue and earnings on a quarter-to-quarter basis, as the pipeline for these projects often takes more time, sometimes on the order of several years. These companies and their stocks should be viewed in that light. Even so, it was a hard year for large infrastructure companies.

Making It Through The Down Times
Despite the recession, Fluor (NYSE:FLR), the largest engineering company in the U.S., has shown steady, consistent growth in the last three years, with a 17% revenue growth rate. Its revenues flattened during the recession along with its earnings, but the company's five-year earnings growth rate is expected to be 11%. Although Fluor and other behemoth companies have felt the effects of the recession this year, it doesn't mean signs of improvement are not evident. Fluor is the lead company in a $1.6 billion government stimulus project to manage cleanup at a nuclear site near the Savannah River in South Carolina.

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Major Projects On The Horizon
The stimulus money for Fluor is not the only sign of positive forward movement in bookings and, ultimately, for revenues for the large engineering firms. Not only is the Department of Energy project on tap, but with the increased U.S. involvement in Afghanistan, more military construction work also looms for the Department of Defense. Other large firms will benefit from the government spending, as well as the pent-up need for global infrastructure spending. The fact that governments and industries didn't spend on upgrades and improvements doesn't mean that aging plants, equipment and systems will not need to be repaired, rebuilt or built from scratch eventually.

Money Managers Aware
Foster Wheeler (Nasdaq:FWLT) was cited in an interview with Russell Croft of the Croft Value Fund as a good value due to the coming increase in global infrastructure and energy work. Likewise, Fluor and other companies such as the Shaw Group (NYSE:SHAW) are poised to take on what will be an enormous amount of work retro-fitting coal-burning power plants as the new carbon laws mandate. These firms also construct power plants. Although demand may peak in the next few years, there is work on the horizon for these companies. Other infrastructure is also needed. ABB (NYSE:ABB), the Swiss power-construction company and leader in automating technology for power systems, is a part of ongoing global work that is due to expand. Jacobs Engineering (Nasdaq:JEC), another large diversified global engineering firm, had a recent earnings miss which shouldn't deflect attention from its long-term good positioning in the industry, as it, too, is expected to pick up substantial new business.

The Stocks of Engineering Firms
Fluor and the others saw their stock prices fall during the year, and many were trading at P/Es around 10 or 11. Think of these engineering giants as heavyweight industry stars that take time to regroup. But once these companies get their revenues and earnings momentum back on track in the next couple of years, the stocks may be poised for some surprising and substantial gains.

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