Engineering and construction firm the Shaw Group (NYSE:SHAW) had a rough quarter, posting a loss on impairment charges, increased costs and lower revenue. The company, which many investors expected to gain business as the global economy began to slowly improve, has instead seen a slump this quarter. (For more information, see A Primer On Investing In The Tech Industry.)
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Charges Erase Earnings
Shaw took a massive hit on charges in the quarter, with a pre-tax charge of $48.1 million and $29.4 million after-tax charge amounting to 37 cents on earnings was due to loans to Nuclear Innovation North America's South Texas project. Although there may be some eventual recovery of funds, Shaw took the entire charge now. Shaw also took a charge on $112.8 million pre-tax, $68.9 million after-tax, an 88 cents per share forecast cost increase due to subcontractor issues for an energy and chemicals project. Together these charges per share total $1.25, which rendered Shaw's diluted EPS at a loss of 86 cents compared to a profit of 57 cents in last year's quarter. Without the charges, EPS would have been a positive 39 cents.
More On The Quarter
Shaw's revenue dipped close to $1.5 billion from $1.8 billion in the same quarter a year ago. Although the company touted its $19.7 billion unfilled orders backlog, this is less than the $20.6 in the previous quarter. The company also gave guidance for the upcoming quarter and preliminary full fiscal year results which disappointed the market. Shaw projects to earn 60 cents per share in the fourth quarter, which would be less than analyst forecasts of 77 cents. For the full fiscal year, Shaw expects diluted earnings per share of $2.20 to $2.50 on revenue of $6.2 to $6.5 billion. Analyst estimates were for earnings of $2.73 per share on revenue of $7.18 billion.
Engineering And Construction
While the engineering and construction sector did extremely well prior to the financial downturn of 2008, with the increase in global demand for energy and infrastructure as the global economy continues to slowly recover, many observers have expected stronger results from these companies. The stocks in this sector have been battered. McDermott (NYSE:MDR), with its oil and gas offshore construction business, has seen its stock down nearly 60% from its 2008 highs. Foster Wheeler AG (Nasdaq:FWLT) with its wide range of construction and engineering services, has had its stock take a similar plunge, as has Jacobs Engineering (NYSE:JEC), with its technical and industrial business. URS (NYSE:URS) has at least managed to rebound somewhat better, as its stock is down only half as much as the others. (To help you determine if these stocks are on a downward trend, check out 7 Signs A Stock Is Set To Slide.)
Investors Await the Rebound
Engineering and construction obviously still has a ways to go. Shaw's business needs to sustain a solid rebound, as even with the charges excluded, its third quarter performance wasn't good. After the quarter's end, Shaw landed a $500 million contract with Entergy, as well as additional contracts for nuclear power plant maintenance for Florida Power & Light and Next Era Energy Seabrook. With these, Shaw provides maintenance service to 41 of the 104 operating U.S. nuclear plants.
The Bottom Line
Shaw should be able to perform better in the upcoming quarters, but of all the engineering and construction firms, it is known for its nuclear power work. Investors are divided as to how this will play out; whether or not there will be greater opportunities for Shaw given a more safety-conscious industry after the Fukushima disaster in Japan, for either rebuilding or maintaining nuclear projects and plants. Given the global caution lights on the nuclear industry, though, investors would do well to monitor how that goes before jumping in to buy Shaw stock. (To learn more about nuclear power, check out The Economic Reasons Behind Nuclear Power.)
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