The Engineering & Construction Industry performs a variety of services ranging from design to decommissioning of all kinds of capital projects. Activities include architectural and engineering design; procurement; construction and construction management, operation and maintenance of facilities; as well as project decommissioning and site remediation. While all E&C companies are in man of these sub-fields, none do all of them in every market. Thus, there is some specialization in the fairly homogeneous industry.
Energy, in all its forms, has been a main spring for growth in the E&C business, and that should be the case for many years to come. In the United Sates, the relatively new technologies of horizontal drilling and hydrofracturing have opened vast new resources of oil and natural gas in shale formations known only to industry specialists. The new fields will require new pipelines and processing facilities to market them. New oil and gas export facilities will be built, too, since the U.S. is likely to become a net exporter of energy in less than 10 years. The U.S. petrochemical industry will also benefit from the low price of natural gas, vis-à-vis that of oil, as chemical companies shift to natural gas not only for heat but also as a feedstock. Other major clients included governments of all kinds, from the U.S. government – the largest user of outsourced services in the world – to towns that have recovered from the recent recession and can afford to build or upgrade roads, bridges, and transportation facilities.
This industry is more international than most in The Value Line Investment Survey, with many companies deriving over half their revenues outside North America. Energy facilities are major customers there, too, but the U.S. E&C companies compete effectively for government business, even in Europe. And, as with many businesses, emerging markets in the Middle East and Asia are high on the list of potential clients for the E&C companies.
With many companies at or just off their all-time peaks, above-average capital appreciation potential can be hard to find. Still the group offers two companies that qualify: Aecom Technology (ACM) and Fluor (FLR).
Aecom Technology Corp.
Aecom Technology is the world’s largest general architectural and engineering design firm, according to Engineering News Record’s 2013 design survey. Beside design, it offers early planning and consulting and construction management services in about 150 countries through its professional and technical service segment. Projects included highways, airports, bridges, mass transit systems, government and commercial buildings, water and wastewater facilities, and power transmission and distribution. The small management support services division provides program and facilities management, training, logistics, and other services, primarily for the United States government.
Major project types include facilities (38% of December-period revenues); transportation, 26%; and environmental, 18%. Geographically, about half of Aecom’s business is in the Americas, with the balance split evenly between Europe/Middle East/Africa and Asia-Pacific. Major projects included New York’s Second Avenue Subway, the Hong Kong-Zhuhai-Macao Bridge, and Crossrail, the largest addition to the transit system in London and southeast England in fifty years. Unlike many of its peers, Aecom does not have any craft employees and performs no direct construction work.
Aecom forecasts fiscal 2014 (ending September 30th) earnings per share of $2.50-$2.60, including an unusual $0.20-a-share lift in the December quarter. Excluding that, results would be little changed from fiscal 2011. While several regions look promising, activity in Australia will be down, year to year, and Barrick just canceled its huge Pascua Lama gold mine, lopping $1.8 billion, or 10%, off the company’s backlog. Still, we look for solid earnings growth in the years to come as Aecom continues to grow in emerging markets and supplements organic growth with bolt-on acquisitions. Some direct investment ought to help, as well: the company has formed Aecom Capital to take minority stakes in revenue-generating projects; its $1590 million has already produced about $1 billion of backlog. All told, we anticipate that the company will be awarded a higher price/earnings ratio in the out years, boosting its capital appreciation potential.
At around $12 billion, Fluor’s market capitalization is the largest in our E&C industry group. The company performs engineering and design, procurement, construction, fabrication and modularization, commissioning and maintenance, and project management services globally. Major client industries include oil and gas, chemicals and petrochemicals, transportation, mining and metals, power, and manufacturing. It also provides services to the United States government as well as operation and maintenance work for industrial clients. Fluor operates through five segments: oil and gas; industrial and infrastructure; government; global services; and power.
Fluor’s December-quarter revenues derived 48% from oil and gas business; 35% from industrial and infrastructure projects; and 10% from power. The backlog includes 57 % from oil and gas and 30% from industrial and infrastructure. Geographically, 36% is in the U.S. 24% in the rest of the Americas; 33% in Europe/Middle East/ Africa; and 7% in Europe/Middle East/ Africa. Major contracts under way or soon to start include the Strategic Petroleum Reserve; the Tappan Zee Bridge; and the first Canadian liquefied natural gas export facility, at Kitimat, British Columbia.
Fluor forecasts 2014 earnings per share of $4.10-$4.60, up from $4.06 in 2013. Share net ought to advance at a high single-digit rate over the next few years, as the world economy expands and the United States starts to perform much-delayed infrastructure upgrades. Acquisitions will certainly help: Fluor is not only bigger but better-heeled than most of its peers, with around $1.9 billion of net cash (cash less total debt) on its balance sheet. Adding to its longer term appeal, FLR just raised its dividend 30%, to an annual rate of $0.84 a share. The yield is still a modest 1.1%, but the large hike could evidence an inclination to keep lifting it.
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|Babcock & Wilcox
|Chicago Bridge & Iron
|Foster Wheeler AG
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.