Foster Wheeler Ltd. (FWLT): Foster Wheeler upbeat at GS Industrials Conference - Goldman Sachs - 11/08/07
News
A day after reporting impressive 3Q07 earnings results (FWLT reported $1.78 vs. consensus estimates of $1.38), Foster Wheeler’s CEO, Ray Milchovich, joined us at the GS Industrials Conference in New York City.
Analysis
There were three key takeaways from our discussion with Ray today:
(1) FWLT’s end markets remain robust,
(2) 2008 margins are sustainable and there is opportunity for expansion, and
(3) projects are getting bigger and more complex, leading to longer sales cycle time.
End markets: FWLT was positive on end market demand, specifically for energy related projects (e.g., delayed cokers, LNG, petrochemical). Geographically, all regions remain strong, particularly the Middle East, Asia Pacific, and Latin America. Ray also confirmed our belief that customers have not yet contemplated projects to build if $80-$90/barrel oil is sustained – a positive sign that the energy build-out cycle has legs.
2008 margins: Ray believes we should continue to see margin expansion in 2008. He credits FWLT’s industry-leading margins to
(1) product differentiation (e.g., delayed cokers, CFB technology) and
(2) management’s focus on bottom line results.
Based on increasing “as sold” margins for recent awards, margins should remain strong as long as FWLT continues to execute. We have forecasted 130 bps in operating margin improvement in 2008. Longer sales cycle time: Given that projects have become bigger and more complex, it’s taking longer for owners to move forward on projects. This could lead to lumpier new awards but should not sway investors from strong fundamentals continuing to drive energy investment.
Implications
FWLT remains on our Conviction Buy List, although we also rate the shares of JEC and CBI as Buy and recommend that investors buy all three stocks to mitigate project execution risk in any one name. |
