13F filings by reputed money managers are often a good starting point to screen potential investment opportunities. Although not foolproof, this approach gives a good list of the companies which deserves a deeper look from investment perspective. David Tepper is one of my favorite money mangers and I track his positions closely. His recent filing indicate that he is becoming very bullish on Engineering and Construction companies off late. He not only bought shares of companies like KBR (NYSE: KBR ) , Chicago Bridge and Iron (NYSE: CBI ) , and Fluor (NYSE: FLR ) last quarter, but also bought call option in each of them. In this article, I will be discussing some of these companies in detail.
Bottoming backlog, margin expansion prospects and low valuations
KBR recently reported better than expected earnings and management raised lower end of its FY13 guidance range. The company's backlog stood at $13.8 billion at the end of second quarter, a decline of 2.90% from $14.2 billion at the end of first quarter. However, most of this decline can be attributed to currency fluctuation which affected the company's backlog by $600 million. Sans this impact, KBR's backlog was up quarter over quarter. The potential project pipeline for the company remains solid. Some of the key projects for the company include Kitimat LNG (late 2013 or early 2014), Gorgon T4 and Tangguh additional train FEEDs (early 2014). I expect the company's backlog and revenue will increase going forward.
In addition to the good topline growth prospects, the company's margins are also likely to increase. The lower margin projects in Hydrocarbon segment Skikda and Escravos are almost over and in the commissioning phase. Also, the company's higher margin Gorgon LNG project continues to ramp up. In addition to hydrocarbon segment, margin prospects in Infrastructure, Government and Power business also looks solid. This segment's margin suffered from the two problem mining projects in Indonesia which are now almost complete. The company took no additional charges on these projects during the second quarter.
According to consensus estimates, KBR's EPS is expected to grow by 23% in the current year and 15% next year. The company is trading at a forward P/E of just 10x despite of good revenue and margin prospects.
Lowered order guidance just a timing issue
Chicago Bridge and Iron recently reported better than expected results. Although management lowered its 2013 guidance, it was already expected and it is more of a timing issue rather than a fundamental concern. The Freeport and Cameron LNG projects, which were earlier expected to be awarded in 2013 have now likely moved to 2014 causing the downside in the order guidance. In addition, similar to KBR, currency fluctuation is likely to negatively impact orders this year by ~$600 million.
The company is well positioned to benefit from large scale LNG and propylene projects in the US as well as internationally. In addition, the company's prospect in power business also looks good post the acquisition of SHAW Group. On the recent earnings call, management noted that they are well ahead of schedule in terms of cost savings from SHAW integration. They expect to exceed their cost saving target of $30-50 million by the year end.
Chicago Bridge and Iron is trading at a forward P/E of just 11.73 times despite of expected EPS growth of 35% in the current year and 23% in next year. The stock has gained over 60% in the last one year and it is likely to continue its momentum going forward.
Accelerating new orders and strong cash position
Fluor booked new awards worth $7.2 billion in the last quarter, a sequential increase of 10%. Going forward, new award run-rate is likely to further accelerate given high oil prices which are acting as a catalyst for high capex investment by petrochemical and LNG companies.
The company's prospects in power business also look good. Recently, the company announced that it has received a final notice to proceed on a $1 billion natural gas-fired power station project by Dominion Virginia Power. The company is expected to book ~$800 million into backlog in the third quarter from this project. To put it into perspective, this is greater than total $500 million in power awards which the company received in first half of this year.
In addition to backlog growth, company is witnessing a mix shift from low margin mining projects to high margin hydrocarbon projects. This will help the company's margin going forward.
Fluor is trading at a forward P/E of 14.31 times consensus EPS estimates. However, if we adjust for ~$2.5 billion cash on its balance sheet, it is trading at just 10.84 times forward earning which is low given its good growth prospects.
To sum up, it makes sense for investor to follow David Tepper and initiate position in these E&C companies at current prices. The valuations of these companies are low and most of them have good growth prospects given the encouraging outlook for capital expenditure by Hydrocarbon companies (their end customers).