Build it and they will come. Yeah, sure. Maybe. But can you still make a buck off it? And did you take on too much risk in the process?
These are the questions that large-scale engineering and construction companies do (or should) ask themselves. And with a clean balance sheet and a stated goal of producing good returns relative to risk, Washington Group (Nasdaq: WGII) might just be different enough to merit a long look.
Like most of its competitors, Washington Group reported a solid quarter. Revenue rose 18% as most units reported growth. Margins get a little goofy because of the accounting treatment of certain payments made to British Nuclear Fuels, but pro forma operating income was still up by a double-digit amount, and net income growth matched the top-line figure.
Because Washington Group reports results for six operating segments, talking about them all in detail would turn this story into more of a saga. Let's just say that most of the usual suspects are doing all right -- there's good business activity in the chemical and energy sectors, power and industrial are perking up, government business is still good, and infrastructure is a little problematic because of some cost issues.
Given that I'm a miserly curmudgeon, I have to admit I am pleased to hear the extent to which management talks about earning solid economic returns and avoiding unduly risky projects. After all, what good is there in winning a $500 million project if it costs you $550 million to complete it (and you can't recoup those costs)?
What's more, with no debt on the balance sheet, I've got to like the cash flow distribution prospects for the coming years. There are a lot of coal projects in the planning stages, and while Fluor (NYSE: FLR), McDermott (NYSE: MDR), et al will get their share, so too will Washington Group. And that's just one segment -- there are plenty more projects coming as well, like environmental cleanups, mines, roads, and so forth.
Valuation here might still be in the "reasonable" zone. I'd like to see slightly higher returns over this upswing in the cycle, but investors looking at investing in large-scale infrastructure should take a look here.
For more constructive Foolishness:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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