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Balanced Risk-Reward for Foster Wheeler

Zacks Equity Research

On April 10, 2014, we issued an updated research report on Foster Wheeler AG (FWLT). In the recent past, the company’s business has been benefiting from its proposed acquisition by AMEC plc, initiatives taken to improve its fundamentals and continued contract wins.

Foster Wheeler signed a definitive sell-off agreement on Feb 13, with a U.K.-based company, AMEC plc. The stock has been on uptrend since then, gaining nearly 32% to date.

Foster Wheeler is witnessing a growing need for capacity additions in a number of developing countries. The alliance with AMEC will lead to an expansion of production capacity while increasing efficiency across the vertical supply-chain.

Foster Wheeler has recently received a number of contracts for front-end engineering work and subsequent significant work for engineering, procurement and construction. The trend is likely to continue as the company expects the global demand for electrical energy to increase and solid-fuel-fired steam generators to play a significant role in meeting the energy demand.  Moreover, clients are expected to continue investing in new and advanced technology to meet the rising demand for energy.

Moreover, the company is focused on strengthening its business and gaining market share through strategic acquisitions to enrich its product portfolio. As part of its endeavors, in March, the company announced that it would be taking over South Africa-based mining company, MDM Engineering Group Ltd. for approximately $109 million and Siemens Environmental Systems and Services business from Siemens Energy, Inc. for an undisclosed amount.

However, several market constraints impacted the company’s top and bottom lines in its fourth-quarter 2013 results. These factors include short-term sluggishness in the power generation segment across the globe, changing environmental regulations in Europe and low natural gas prices in many regions that delayed the retrofit markets. Moreover, the price of natural gas is expected to be on decline for as many as three to five years ahead, owing to the increasing availability of the gas.  

The company is also exposed to severe risks due to its acquisitions.Though acquisitions are expected to add to the company’s growth, there are significant integration risks. The company’s proposed acquisition by AMEC plc. is likely to close in the second half of 2014, which may drag its results in the near term.

Also, the projects included in the company’s backlog are usually long-cycle projects which may also be delayed or cancelled, thereby impacting Foster Wheeler’s operations and cash flows.

Stocks That Warrant a Look

At present, Foster Wheeler has a Zacks Rank #3 (Hold). However, some better-ranked players in the engineering and heavy industry that are worth a look include Pernix Group Inc (PRXG), Quanta Services, Inc. (PWR) and VESC Corp. (VSEC). While Pernix Group sports a Zacks Rank #1 (Strong Buy), Quanta Services and VESC havea Zacks Rank #2 (Buy).

Read the Full Research Report on FWLT
Read the Full Research Report on PWR
Read the Full Research Report on PRXG
Read the Full Research Report on VSEC

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