Removing FWLT from Americas Conviction Buy List November 13, 2007 - Goldman Sachs
What happened
We are removing shares of FWLT from the Conviction Buy List. FWLT shares have risen 39% since we added them to the Conviction Buy List on May 30, 2007 versus a -5% return from the S&P 500. Over the last 12 months shares are up 177% vs. the S&P500 up 4%. With GS oil analysts no longer long oil (see Jeff Currie’s 10/30 note: “Time to take profits as risks are more balanced”) and the positive catalyst of 3Q07 earnings behind it, we believe that Foster Wheeler shares could take a brief pause here before resuming what we believe will be longterm price appreciation for the stock. E&C stocks tend to trade in a close correlation with oil prices.
Current view
We maintain our Buy rating on FWLT shares. We believe that FWLT remains one of the best positioned E&C companies in what we believe will be a long-run global energy infrastructure build-out cycle. But with shares up 177% over the last twelve months, market risk aversion increasing, and our crude oil analysts less constructive on the nearterm outlook for oil price appreciation, we are removing FWLT from the Conviction Buy List. We continue to believe, however, that once oil market volatility abates,
FWLT shares will be buoyed by
(1) continued high oil prices,
(2) solid margins in E&C and Power and
(3) likely strong new award activity coming on the heels of FWLT’s FEED work it is performing now plus new opportunities emerging around the world for process engineers.
FWLT is currently trading at 19.8X 2008 estimated earnings, an 8% discount to the E&C peer group average multiple of 21.6X. We maintain our 6-month $160 price target based on a normalized EPS estimate of $6.94 and normalized P/E multiple of 22.0X. Risks to our Buy rating on FWLT and our $160 price target include a drop in oil prices, project execution risk, and new contract award delays as projects become larger and more complex. |
