Hot For Hydrocarbons
The Blueprint is a quarterly publication designed for E&C investors. The
Blueprint provides an in-depth analysis on current hot spots, new contract
awards, backlog, and revenue trends.
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Expect In-Line 4Q09 Earnings With Weak Orders. We expect 4Q earnings will
largely come in-line with expectations, though orders will remain weak with bookto-
bills below 1.0. However, in our view, the market is already pricing this into the
stocks as the group continues to trade near trough valuations. With foreign E&Cs
trading at a 2-4x premium to the U.S. names, we think investors should be
increasing exposure to the group. In our view, the domestic E&Cs—particularly
those with outsized hydrocarbon exposure—should see multiple expansion as
investors become increasingly confident that 2010 is the trough for new awards
and EPS. We believe 2011 will be a more promising year with a meaningful
recovery in hydrocarbon, power and government markets.
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Prefer Oil & Gas Over in ’10; Warming Up to Power. We continue to prefer
hydrocarbons in 2010. However, we are warming up to power as we suspect this
market may become more of a focus in 2011. Additionally, we think a substantial
portion of the negative news is already being priced into the stocks. We also like
mining (orders in late-2010/early-2011) as well as the potential for large Govt.
nuclear D&D awards in 2011.
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Top Picks. Our top picks for ‘10 remain MDR and FLR. We also think the recent
weakness in PWR creates an opportunity for investors as the CREZ news was
blown out of proportion. Our contacts suggest the Oncore/Garland issue gets
resolved fairly quickly and will not delay other portions of CREZ. Furthermore, we
do not believe PWR was well positioned to win the Oncore portion anyways. We
are more optimistic PWR wins work with Electric Transmission Texas and
Sharyland. We also believe the Sunrise transmission project moves forward in
the next several weeks, which should serve as a positive catalyst. Finally, we
think investors are under-appreciating the pipeline spending outlook (detailed
analysis included in report) for PWR (via Price Gregory acquisition) and WG.
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JOBS Bill May Boost Infrastructure Multiples in 1Q; Don’t Be Fooled. In
recent weeks, we have heard increased chatter surrounding the JOBS bill
(approved by the House). The Senate is expected to take up the bill in January.
Under the current proposal, the JOBS bill would allocate $27.5B in funds to
highway infrastructure. As such, in the near-term (mainly 1Q), we would not be
surprised to see a boost in multiples for infrastructure names. However, similar to
speculation prior to the passage of the stimulus last year, we believe the JOBS
bill will prove to be disappointing and would use strength as a selling opportunity.
We continue to fear stimulus money will be used for filling budget gaps given the
dire outlook for state and local governments.