Industrial product analysis
This paper intends to establish a personal investment opinion between two publically traded companies – Foster Wheeler and Fluor Corporation. Both companies are engaged in the industrial goods sector of the heavy construction industry. As domestic and developing nations need infrastructure in oil and gas, oil refining, construction, environmental, and power generation to name a few, both Foster Wheeler and Fluor will benefit. Many of the companies in this industry have seen demand rise for their services in the past few years. In fact, since 2003 the Dow Jones Heavy Construction Index – which includes Foster Wheeler and Fluor Corporation – has risen from less than 100 to over 700 points.
Some of the other companies included in this index include Chicago Bridge & Iron Company, McDermott International, and Shaw Group. Foster Wheeler and Fluor Corporation’s stock price follows much the same trend as the index above. For the year 2007 Foster Wheeler is up 192% while Fluor Corporation has more than doubled rising 103% year to date.2 If recent performance is any indication of future potential either company will benefit with the growing demand for their products. However, I wanted understand which company would make a better long-term personal investment. I
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Foster Wheeler was founded in 1894 and is based in Clinton, New Jersey. In 2001 Foster Wheeler Ltd was incorporated under the laws of Bermuda. On May 25, 2001 Foster Wheeler underwent a reorganization in which shareholders received one share of Foster Wheeler Ltd for each share of Foster Wheeler Corporation they owned. Foster Wheeler Ltd, as it stands today, is essentially a holding company which owns the stock of various subsidiary companies. Foster Wheeler’s fiscal year concludes on December 31. Revenues for the company are recognized under the percentage-of-completion method. Contracts in process are stated at cost, increased for profits recorded on the completed effort, or decreased for estimated losses.
Foster Wheeler operates in two business groups. The Engineering and Construction Group designs, engineers, and constructs petroleum, chemical, petrochemical and alternative fuels facilities related to infrastructure. This includes power generation and distribution, production terminals, pollution control, water treatment and process plants for a number of chemicals. This group was recently reorganized in 2004 with a heavy emphasis on improved sales effectiveness and booking high quality contracts. This group accounts for roughly 62% of Foster Wheeler’s business.
The Energy Equipment Group designs, manufactures and erects steam generating auxiliary equipment for power stations and industrial markets globally. The steam generating equipment includes conventional boilers firing coal, oil, gas, biomass, waste wood, and other low-Btu gases. This group also provides research analysis and experimental work in several fields including fluid dynamics, heat transfer, combustion, and fuel technology. This group accounts for 38% of Foster Wheeler’s business.
Looking back over the past 5 years Foster Wheeler appears to be a company coming out of huge debt obligations that were hurting working capital, net income, and its overall ability to finance new projects. In fact from 2002 to 2005 net income was negative while 2006 net income finally came in positive at $373 million. Long-Term Debt in 2002 was $1.07 billion with the current portion of that being $46 million. Compare this to Total Assets in 2002 of $2.8 billion and we can see Long-Term Debt consisted of over one-third total assets.
This was impacting the company in a serious way because of the nature of their business and the need to finance many of their projects and materials with long-term maturing instruments they were having a difficult time securing new debt. In 2004 Foster Wheeler went through a liability restructuring plan to reduce their long-term debts through a mix of equity as well as debt with longer maturities. As part of the restructuring they also divested themselves of several under performing segments.5 Horizontal common size shows us these changes have had a significant impact on long-term debt as 2006 makes up a little more than 16% of the total from 2002. Cash on the balance sheet has also risen in recent years to $610 million in 2006 and it now
For companies in the Heavy Construction industry the sign of future earnings to come shows up in newly awarded contracts and backlog of projects. Backlog consists of projects that have signed contracts where work is likely to take place. Of course, this can change at any time and there are charges incurred by the customer if a contract should be broken. From 2004 to 2006 Foster Wheeler has seen new awards increase 137% to $33.7 million while backlogs increased 182% to $37 million.7 In 2003 they launched a major change to the way they plan and execute projects in the field using a best-in-class project management system. Recently, importance is being placed on environmental responsibility and newer cleaner energy. Many companies are poised to benefit from this new environmental movement and that includes Foster Wheeler. In fact there was a recent press release article where Foster Wheeler signed an agreement with Praxair to develop clean coal technologies and integrated oxy-coal combustion systems.
Overall, Foster Wheeler’s balance sheet and income statement are also starting to look much better. They have lowered their debt and have raised cash levels over the past few years. They are a good turnaround story as of late and appear poised to benefit from a solid restructuring plan in 2004. They also show a strong increase in new awards and backlogged projects which will help drive revenues in the future.
Fluor Corporation was incorporated in September of 2000. This was part of a reverse spin-off transaction that separated them from their coal business which now operates under the Massey Energy Company name. Through various other predecessors they have been in business over 100 years. Fluor defines its business as providing engineering, procurement, construction and maintenance services globally.
They operate in five segments including oil and gas, industrial and infrastructure, government, global services and power. Fluor claims several competitive advantages that assist them in providing excellent services to customers. These include excellence in execution, financial strength, safety, global execution platform, market diversity, long term client relationships, and solid risk management understanding.
For 2006, 2005, and 2004 revenues earned from the United States Federal Government accounted for 20%, 21%, and 24% respectively of total revenues. No other customer accounts for over 10% of their revenue. They claim in their recent 10-K that losing any of their government business would not have a substantial impact on revenues. Fluor’s fiscal year ends on December 31. Revenue for Fluor is recognized on a percentage-of-completion method similar to Foster Wheeler. Backlog is a measure of the total dollar value of work to be performed on contracts awarded and in progress.9
Fluor’s financial condition looks very solid over the past 5 years. They have maintained good reserves of cash on their balance sheet. Over the past 5 years cash has made up roughly 20% of total assets. In 2006 this figure accounted for about $976 million. Long-Term debt has remained steady at $17.6 million over the timeframe. Considering total assets are roughly $4.9 billion long-term debt makes up a small fraction of this.10 As stated above, this industry is highly competitive with new projects needing significant financial obligations including securing new debt to fund operations. Fluor has been able to maintain its status as an industry leader because of their solid debt ratio. Revenue’s from 2002 to 2006 have increased 141% while gross margins have increased 135% over the same timeframe. Net Income follows this same trend rising 161% from 2002 to 2006. Aside from a slight dip in 2003, Fluor is increasing profits in a steady