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Strategies & Market Trends : Value Investing

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To: Sergio H who wrote (44476)	9/21/2011 9:50:12 PM
From: E_K_S	Read Replies (1) of 78687

Hi Sergio - Foster Wheeler AG (FWLT) - My valuation observation First, from my previous post, I started buying these Heavy Construction companies towards the end of 2008 and beginning of 2009. My target list was narrowed down to FWLT CBI SHAW FLR & SI. finance.yahoo.com. The theme of the investment was based on the expansion of the Oil & Gas infrastructure from all the domestic shale drilling and/or Obama's stimulus program to fund shovel ready projects with the U.S. Government's $800B spending spree and/or new proposed Energy stimulus funding w/ lots of chatter about new nuclear plants. I started positions in all of the companies except FWLT (based on current PE valuations). After the Japan nuclear disaster, I closed (FLR & Shaw) or peeled off shares (SI & CBI) in all my construction companies. As my remaining shares approached new highs in 2010-2011. I closed out SI and maintained a 50% position in CBI as they continued to land new NG infrastructure contracts (search this thread for "CBI" as these posts document several major contracts). [This link might work: siliconinvestor.com ] (Note: I use the "search" feature a lot on this thread especially to check up on my old posts and to see the exact entry prices and dates of buys and sells of posters) Valuation Criteria: I have learned that standard valuation metrics are different for these Heavy Construction companies. The best first look is to look at their order book and if it has been growing and how large it is when compared to past historical cycles. A quick review of FWLT's order book shows it is at historical highs going back to 2008 levels. Second I look at if they are earning money and how their PE compares to peers in the group (see the current PE's from the Yahoo link above). I want Forward PE's to be falling but these are not critical as they represent analysts estimates which could be wrong. Third, and now an important value criteria for me is the LT Debt profile of the company. How leveraged is it and can their annual net income cover their LT Debt obligations in 1 year or less. These Heavy Construction companies must have little to no LT debt because of the cyclical nature of their business. SHAW was a quick sale for me as they carried a lot of debt from their Hitachi/Westinghouse nuclear business. They recently sold their 50% share back to Hitachi. CBI has a very manageable LT debt from acquired companies which have made them the leader in the NG infrastructure business. Annual FCF has been paying this debt off while building BV of the company at a greater rate than some of the other companies on my list.. As far as FWLT, I only considered their PE and forward PE not their PEG. It was their large order book and forward PE of 9 that peeked my interest. Since I have a pretty good understanding of the peer group of companies, FWLT looks to me to be the best value buy (at this time). I still feel that the domestic NG & Oil infrastructure will demand more dollars for at least the next 5 years, FWLT and CBI should get their fair share of orders. CBI demands a 10 PE looking forward and I can get FWLT for 9. Portfolio Weighting: Based on my 2009 portfolio sector weighting for Heavy Construction companies (2.5% of total portfolio), w/ my FWLT buy today I am up to 30% of my target portfolio weighting. I really want to build this up higher and plan to buy more CBI and/or FWLT. I would like to increase the size of my position by 70% but only if I can buy at the right price (A 10 PE or less and very large order book). The risk reward for FWLT is a bit better than CBI at 75% return vs 65%. My 2-3 year sell target for FWLT is around $35.00/share (75% upside) and CBI is $ 50.00/share (66% upside). That's how I evaluate my small FWLT buy today. I try to build a position w/ several small buys over time. As always, I have been wrong many times and will be wrong in the future. It does help to at least have a method to the madness and I hope I am buying closer to the bottom than the top. It's a 2-3 year ride after all. EKS

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