We maintain a Neutral recommendation on Foster Wheeler AG (FWLT).
The company delivered a robust operating performance during the first quarter of 2012, with its net income witnessing growth of about 76% while consolidated revenue increased by 9.9%. Foster Wheeler saw an improvement in demand for its services globally, resulting in an increase of scope backlog during the quarter.
However, given the nature of the company’s businesses, the company is subjected to various environmental laws and regulations in the countries in which it operates, failing which it will have to pay huge penalties.
Since the company’s operations are primarily concentrated in four industries -- oil & gas, oil refining, chemical/petrochemical and power -- the completion of its projects takes a long time, and has an impact on the company’s current cash flows. Therefore, though the company has been performing well, we currently maintain a Neutral recommendation on the stock.
Foster Wheeler has felt a growing need for capacity additions in a number of developing countries, all of which have a preference for solid fuel boilers. The company’s CFB technology continues to be its preferred solid fuel technology when a client has a hard-to-burn fuel or needs flexibility in fuel type. We believe that world demand for energy will continue to grow over the long term and that clients will continue to invest in new and upgraded capacity to meet that demand.
In first-quarter 2012, the company received a number of small and medium size contracts, above the average quarter of 2011. The increased activity reflects Foster’s strong position in a wide range of markets across both business lines and geographies. The company is successfully executing its previous backlog, deriving significant benefit from them. Foster Wheeler expects to see increased revenue in 2012 on a year-over-year basis.
However, during first-quarter 2012, EBITDA for E&C Group declined compared with the average quarter of 2011 (from $41.7 million to $46.9 million) due to higher sales pursuit costs and a decline in equity earnings from partially owned power projects in Italy. This, however, was offset by rise in EBITDA for GPG.
Foster Wheeler AG is based in Zug, Switzerland, but its operational headquarters are in Clinton, NJ. The company operates through two business groups: the Global Engineering and Construction Group -- or Global E&C Group -- and the Global Power Group. Major competitors of the company are Fluor Corporation (FLR) and Jacobs Engineering Group Inc. (JEC).
Foster Wheeler currently has a Zacks #3 Rank (Hold recommendation) over the next one-to-three months.
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