April 11, 1996
The Shaw Group Inc. (NASDAQ: SHAW)
11100 Mead Road; P.O. Box 40187
Baton Rouge, LA 70835
Phone: 504-296-1140
Fax: 504-296-1199
Closing Price, April 11, 1996: $18 3/8
Trade: Buy 300 shares
THE COMPANY
The Shaw Group is the largest piping systems fabricator in the U.S., serving primarily the electric power, chemical, and refining industries worldwide. Shaw has fabrication facilities in Louisiana, Oklahoma, South Carolina and Venezuela, engineering offices in New Jersey and Toronto, Canada, a pipe hanger facility in Texas, and a joint venture facility in Bahrain. The company also has a state-of-the-art specialty pipe fittings manufacturing facility in Shreveport, La.
Prefab piping is widely used in the U.S. for jobs in process industries, such as refining, petrochemicals, and pulp and paper. Shaw Group's share of this market is over 50% -- up about 20 percentage points from a year ago. In overseas markets, Shaw is capturing an increasing share of power plant work construction and expansion, which typically carries fatter profit margins than other projects.
The company has long been the low-cost producer in its industry. It achieves this by prefabricating much of its piping systems at its own plants, rather than building them on-site. This not only keeps prices low, it also speeds completion time. Shaw Group was one of the first to use pipe-bending technology to replace time-consuming and costly pipe fitting and welding. The company also benefits from computer-aided design software that it developed in-house. With this software, project teams can take customers' designs, draw project specifications, and route the designs and configurations directly to the company's materials warehouses.
The company's size helps it get low prices for materials, much of it directly from U.S. Steel. Shaw Group usually bills contract customers for materials at published market prices, so any rises in prices for materials are passed through to the customer.
Foreign sales currently account for approximately one-third of total revenue -- and growing. Indeed, a major reason for the company's IPO in late 1993 was to support overseas growth. In 1994, Shaw Group began joint ventures in Bahrain and Venezuela, and it has since bought out its Venezuelan partner. In a recent story in Investor's Business Daily, Shaw's CFO Bret Talbot said that the company is "interested in adding a shop in the Pacific Rim."
The international power-plant pipe market is growing rapidly and is estimated at around $5.6 billion. Shaw Group has 22 bids out on overseas power projects, and well over half of its backlog is international. Its rivals in this market include Mannesmann, Deutsche Babcock and Sumitomo (source: IBD). Shaw Group has announced new contracts totaling $64 million. Much of this work will be for power plants in China and Indonesia. A five-year pact with Asea Brown Boveri is expected to be worth $20 million to $25 million a year.
Domestically, Shaw Group's competitors include: Centerline Piping, Matrix Service, Prospect Industries, Ricwil Piping Systems, and Turner Industries (source: Hoover's).
The company has grown largely through acquisitions. In 1987, the firm's predecessor bought out B.F. Shaw Co., a century-old business based in South Carolina. Since then, Shaw Group has bought engineering design and consulting services as well as builders of pipe support systems. Early this year, the company acquired Word Industries of Tulsa, one of its main competitors. Word's $28 million of yearly sales and $10 million backlog gave Shaw added market share. It also offered another 100,000 square feet of space, making it one of Shaw's largest plants. If that were not enough, Shaw has renegotiated Word's backlog projects at substantially higher margins, according to the company's IR officer, Laurie Schultz.
Last week, Shaw reported the completion of its latest acquisition: Alloy Piping, a leading U.S. manufacturer of specialty pipe fittings, for $32 million. Alloy had 1995 revenue of $60 million -- which suggests this was a very nice deal for Shaw Group. The Alloy Piping acquisition moves the company further along in its strategy of vertical integration of operations. In its latest earnings report (issued on April 9), the company said it expects that Alloy Piping "will positively impact earnings per share by the end of fiscal 1996."
After a string of several years of steady growth, Shaw Group's earnings dropped in 1994 when the company had to fix a botched fabrication job for a customer. Last year saw significant improvement over 1994, and by late 1995 continuing growth in the domestic chemical and international energy sectors raised the company's backlog to more than $100 million.
At the end of its FY96 first quarter (in November 1995), Shaw earned $1.7 million, or $0.20 a share, versus $0.01 for 1Q:94. Sales were up 26% to $38.8 million. Shaw's backlog at the end of the quarter was $108 million, compared with $70 million a year before.
A couple of days ago, Shaw posted 2Q:96 earnings of $1.8 million, or $.21 per share (versus year-ago $.07), beating the Street's estimate by two cents. This was the fourth consecutive quarter for which the company has reported above-consensus operating earnings. The company generated record sales of $49.6 million for the quarter, up 81% from a year ago.
In the quarter just ended, the company did the majority of its work for domestic refineries and related projects, which tends to have relatively low profit margins. The balance of the year shows comparatively more work for non-US power plants, a higher-margin business. Back-logged work at the end of 2Q:96 stood at a record $115 million, excluding another $8 million in joint-venture back-log.
The company currently carries a moderately heavy total debt load ($43 million) owing to the substantial recent acquisition activity, with a total debt/capitalization ratio of 35% at the end of the last quarter, according to the company. Nearly $30 million of the current total debt consists of short-term revolving loans, however, which the company uses to buy necessary supplies and then bills its customers for. Long-term debt of $13.2 million equals less than 9% of the company's current capitalization.
The company has no specific plans for an additional stock offering at this time, but a secondary offering is not out of the question given the recent (and possibly continuing) rapid pace of acquisitions.
As of February 29, 1996, working capital stood at $41.1 million. Tangible book value per share = $6.45. As of the end of FY95, cash flow per share stood at $0.76.
1991 1992 1993 1994 1995 1996 Sales ($m) 70.3 84.4 120.7 113.2 135.3 88.4 Net income ($m) 2.5 3.4 4.2 3.4 4.3 3.5 Income as % of sales 3.5% 4.0% 3.5% 3.0% 3.2% 4.0% Earnings/share($) 0.29 0.44 0.63 0.44 0.50 0.41
(source: Hoovers and Shaw Group)
THE STOCK
SHAW is currently trading at approximately 21 times newly revised (upward) estimated EPS of $.92 for the FY ending in August 1996. That $.92 would represent an 84% gain over last year ($.50). FY97 earnings estimates have also just been revised upwards, to as high as $1.40 by one of the two analysts who follows the company. This would indicate that EPS growth in the high thirties to low forty percent range is plausible over at least the next 18 months or so. Both analysts rate the stock a "strong buy."
Investor's Business Daily rates SHAW 70 on EPS growth, 97 on Relative Strength, and A on accumulation/distribution.
Altogether, approximately 25 institutions hold 18% of SHAW stock. CEO and founder James Bernhard owns 23.6% of the firm's approximately 8.725 million shares. Other insiders control approximately another 12%. There has been no recent insider buying or selling. Recent average daily volume has been around 70,000 shares.
CONCLUSION
Shares of The Shaw Group have more than tripled in value over the past 12 months, yet they still represent good value, trading at well under half of estimated annual EPS growth for the FY95-FY97 period. Shaw Group's current market capitalization of approximately $160 million is less than likely total sales for the current fiscal year, another indication of good value.
Based on the stock's current valuation, a share price approaching $30 would be justified by this early next year -- in the neighborhood of a 50% gain between now and then.
--Greg Markus (MF Boring)
