Tickers in this Article: SHAW, GVA, TEX, JEC, FLR
Heavy construction company Shaw Group (NYSE:SHAW) announced the conclusion of its 2011 fiscal year with the release of fourth quarter and full year results. The quarter proved to be tough on the company, however, management is hoping for earnings to improve in 2012, under the assumption they receive construction licenses for their nuclear projects.

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In the meantime, for the 2011 fiscal fourth quarter, Shaw lost $32 million in net income, or 44 cents a share, a significant reversal from the $42 million, or 49 cents a share that the company earned in the year ago quarter. Revenues fell to $1.5 billion in the quarter, compared with $1.7 billion in the 2010 period. The company's Westinghouse segment, which Shaw reports separately, lost an additional $90 million in the fourth quarter.

House Cleaning
The fourth quarter results were affected by various events. Cost increases, schedule delays and legal settlements impacted the bottom line by almost $50 million, after tax. The company's Energy and Chemicals segment was responsible for a bulk of those charges, due to increased costs and delays on a project. In what seems to be a response to these short-comings, the company announced that it is in the process of exploring strategic alternatives for the E&C and that it has already received interest from potential buyers. In addition, the company announced organizational changes among the senior staff, in an effort to simplify the chain of command and create more accountability.

Significant Improvement
With the fourth quarter behind it, Shaw is looking for significant improvement next year. Signs of improvement were kindled in the fourth quarter with a $500 million engineering and procurement contract, a $270 million infrastructure contract and a $110 million pipe fabrication contraction, along with several maintenance contracts whose values were not disclosed. These bookings are part of a $20 billion backlog at Shaw. For 2012, the company expects revenues of $5.5-$6 billion and earnings per share of $2.00-$2.10, excluding Westinghouse.

As of Nov. 1, Shaw shares fetch $23, coupled with a forward earnings multiple of 11. Shaw is one of several mid-cap construction stocks that are on the cusp of returning to profitability, after a few years of a brutal operating environment. Names like Granite Construction (NYSE:GVA) and Terex (NYSE:TEX) could be big winners in 2012, along with Shaw, if the operating environment improves. Larger names like Fluor (NYSE:FLR) and Jacobs Engineering (NYSE:JEC) trade at multiples of 26 and 15 times earnings, respectively. Signs of consistent profitability in 2012 will likely give similar multiples to names like Shaw, leading to share price gains.

The Bottom Line
The market already seems to believe that next year will be better; Shaw shares advanced by nearly 5% after the fourth quarter earnings release. If Shaw and the rest of the industry experience improved conditions and accumulate more projects, the market will likely continue to propel share prices forward from current levels.

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

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