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Coverage Initiation: Babcock & Wilcox
Babcock & Wilcox (BWC) recently returned to the pages of The Value Line Investment Survey. The company provides engineering, construction, and management services to customers in the electric power generation industry and for the U.S. government. It specializes in two areas: building power generation systems that use fossil fuels, nuclear power, and renewable energy sources; and serving as a contractor to the U.S. Department of Defense and Department of Energy in sensitive, high-security projects. Examples in the latter category include supplying nuclear fuel for the U.S.’s nuclear-power submarines and aircraft carriers, and managing part of the work at the Oak Ridge, Tennessee national nuclear facility.
Babcock & Wilcox was formed in 1867 to sell water tube boilers. B&W boilers powered New York City’s first subway. From the start of the Manhattan project, Babcock & Wilcox provided materials, components, and process management for national defense efforts. The company designed and fabricated the propulsion system for the U.S.S. Nautilus, the world’s first nuclear-powered submarine. McDermott International (MII) purchased Babcock & Wilcox in 1978. In March 2010, MII prepared B&W to be spun-off. BWC shares began trading publicly on the NYSE in July 2010, after a hiatus of some 32 years.
Though the meltdown of a nuclear power plant in Japan in the aftermath of March’s devastating earthquake in that country has hurt prospects in the company’s commercial nuclear power division, B&W’s overall business prospects look quite good. The U.S. government provided 39% and 33% of BWC’s top line in 2010 and 2009 (2009 figures pro forma), respectively, via long-term, steady contracts. This is repeatable revenue for Babcock and a source of stable profits. Indeed, the government’s proposed fiscal 2012 budget includes funding increases for B&W’s national security and modular nuclear reactor businesses.
In the commercial power generation sector, it appears likely that a new utility infrastructure spending cycle will begin in the next 12 to 18 months. After falling during the recently ended recession, U.S. power generation increased 3.6% in 2010. As a result, utilities’ power plants are running closer to capacity, making increased spending probable. In addition to greater demand for new generating capacity, it is likely that plant maintenance demand will increase in the coming years, as well. Indeed, the EPA has proposed stringent new rules for coal-fired power plants, which would likely boost demand for Babcock’s environmental maintenance services, such as installing scrubbers. Another possibility is that utilities will simply shut down older coal plants and replace them with cleaner burning natural gas, renewable energy, or nuclear powered generation, which would also boost BWC’s power generation construction business.
All told, Babcock & Wilcox’s reemergence as an independent entity comes at a propitious time; we feel that the company can deliver greater value for shareholders on a stand-alone basis, than as a part of a larger conglomerate.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.