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Tickers in this Article: SHAW, FLR, JEC, EXC, SO
Engineering and construction firm Shaw Group (NYSE:SHAW) this week reported headline fiscal Q3 earnings that were up from a year ago. But stripping out $34 million in currency gains from its 20% stake in nuclear power supplier Westinghouse Group, Shaw earned $49 million, or 57 cents per share, a flat result year-over-year. While the diversified contractor is seeing some positive developments surrounding nuclear upgrades, clean air retrofitting and environmental cleanup, other business lines are stagnant and will need a broader economic recovery to cycle back up. IN PICTURES: 10 Tips For Choosing An Online Broker

Clean Air Is Just Good Business
Shaw has five operating segments, serving both private and government clients. While it's most well-known for its expertise in nuclear power services and equipment, Shaw also has sizable business interests in environmental cleanup, petrochemical production and fossil-fuel-based power plant upgrades & maintenance.

Recent clean-air mandates have brought in a solid string of business retrofitting "dirty" power plants, and there are at least 150 additional plants that need retrofitting, according to the Wall Street Journal. Shaw has been getting roughly 40% of this business, competing with the likes of Fluor Corporation (NYSE:FLR) and Jacobs Engineering Group (NYSE:JEC). While the Obama Administration has had to put a stronger energy package on the back burner so far, it's likely that the trend towards cleaner energy production will continue - independent of the state of the broader economy. (Learn more about cleaner energy in What Does It Mean To Be Green?)

Nuclear Business, Order Backlog Strengthening
On the nuclear front, while the U.S. is notoriously silent on new plant production, Shaw's heavy international presence has paid off in new contracts abroad, including work in Saudi Arabia and China. Additionally, a process to increase the power output of existing U.S. nuclear plants has brought a steady stream of business from nuclear mainstays like Exelon Corp. (NYSE:EXC) and Southern Company (NYSE:SO).

All this long-term business has helped grow Shaw's order backlog to a robust $20 billion, up from $14 billion in 2007. A healthy backlog can be both blessing and curse, as it provides stability but also locks in forward prices, leaving Shaw susceptible to changes in input costs in what is already a low-margin industry. Shaw's operating margin trends below 5%, in line with the industry average.

A Silver Lining in the Gulf
The gulf oil disaster is a terrible event, no matter what lens it's viewed through. Few know this better than Shaw Group, which is based in Louisiana and already cleaning up some of the region and assisting BP's engineers. Shaw has considerable expertise in environmental cleanup and wetlands restoration, and the cleanup efforts should bring it considerable business over the next few years.

Balance Sheet, Financial Metrics Attractive
Shaw's balance sheet is looking quite good these days, as the company has nearly $16 per share in cash and minimal long-term debt. Cash flow for the year should top $345 million, giving the company a price/cash flow ratio of under 10 times. The run-rate P/E is in line with the broad market average at 15.5 times earnings, but the company does not pay a dividend, limiting its potential audience of investors.

Yearly Outlook Reiterated
Shaw held to its earlier calls for fiscal 2010 results of $7 billion in revenue and EPS of $2.10 - $2.20. Because the majority of the company's business comes from long-term, multi-year service contracts, there's a lot of visibility on the top line. The guaranteed business has been a nice buffer while the economy is hobbling along, and Shaw also has enough cyclical business lines to participate in a broad economic recovery when arrives.

So far this year, Shaw has outperformed the S&P 500 by 18%, reflecting the attractive duality of stable revenue and upside potential. Potential investors should note that the single biggest risk to the future profitability of Shaw - and companies like it - is inflation, especially in the form of higher commodity prices. Think of it like holding a bond - you know how much money you're going to get four or five years from now, but inflation will eat away at what that money can buy. But if the next few years bring moderate inflation and decent economic growth, Shaw and its peers could flourish and be among the S&P's leading industry constituents. (Learn more about inflation, see Inflation: What Is Inflation?)

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