Some CEOs spend a huge part of their time massaging the concerns of Wall Street, and many base a lot of their self-worth on those analysts' opinions of their stock. With minimal Wall Street analyst interest, though, management at Washington Group (Nasdaq: WGII) can focus instead on actually running their business.
Novel concept, huh?
Business at Washington Group was solid in the fourth quarter. Sales grew over 22% and bookings for new work exceeded revenue for the quarter by more than $80 million. Although some charges related to projects in the Infrastructure group hurt operating income relative to last year, business overall was strong in the fourth quarter and the company achieved its ninth consecutive quarter of higher backlog.
Better still, the company grew its free cash flow by about 16% to over $78 million and ended the quarter with no debt and over $11 a share in cash.
For those unfamiliar with the company, Washington Group is a well-diversified engineering and construction firm that specializes in very large projects like power generation, homeland security, mining, and transportation. Looking only a little bit into the future, it's clear that the global demand for projects like power generation, transportation, defense, and environmental remediation will only grow.
That said, management has some work to do to make sure that shareholders see all of the benefits. Margins for this company are low (typical for the industry) and so is return on equity (not so typical).
While revenue rose almost 17% for the full year of 2004 and net income grew 22%, operating income actually declined. Much of this decline was due to losses on highway projects, but a look outside of this segment shows little operating leverage in the company's other segments as well. Although management believes that new contracts being booked will be more profitable than what we've seen lately, only time will tell for sure.
Fortunately, Washington Group's valuation gives patient investors a reason to stick around and see if management can drive growth in operating profits and improve that ROE. While the company's forward P/E is about 23, the stock trades at less than 11 times EV-to-FCF.
That said, the Street has had a generally mixed view on engineering companies like Perini (NYSE: PCR), Chicago Bridge & Iron (NYSE: CBI), Quanta Services (NYSE: PWR), and StoltOffshore (Nasdaq: SOSA), with only CB&I and Stolt showing strong stock gains.
Nevertheless, I'm going to keep these shares on a watch list and hope to see some improvement in operating margins and returns on equity. Good revenue and backlog growth plus free cash flow are great, but I'm a sucker for strong operating margins and ROEs.
For other engineering Foolishness:
Fool contributor Stephen Simpson owns shares of Stolt Offshore.
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