Please ensure Javascript is enabled for purposes of website accessibility

A Power Player Takes Its Lumps

By Toby Shute – Updated Nov 11, 2016 at 6:51PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shaw Group whiffed, but future contracts will give it a lift.

The earnings of engineering and construction companies are typically as lumpy as Thanksgiving gravy. And when one of these companies puts its numbers on the table, no one's in a thankful mood. Yet those are exactly the times when Fools should think about pouring more shares into their portfolios.

Take the latest results from Shaw Group (NYSE:SGR). The company had a terrific second fiscal quarter in pretty much every respect, yet the stock got rocked.

The fossil- and nuclear-power segment was fired up, as usual. Southern (NYSE:SO) contracted for two nuclear unit additions in Georgia, while two other domestic utilities signed letters of intent for up to two units each. These projects, which have both authorized the procurement of long-lead-time items, are moving forward as if Shaw and its part-owned partner Westinghouse had contracts in hand. Yet these deals, worth roughly $4 billion apiece, don't go into backlog until then. Neither does the very recent $9 billion U.K. coal-fired power alliance with RWE, for that matter.

The point here is that even though official new awards were lower for the quarter than they were last year, Shaw's unbooked but likely projects are worth more than the company's entire $14.2 billion backlog.

The company's maintenance segment, which counts Exelon (NYSE:EXC) as its largest nuclear customer, is performing well, and Shaw points to its half-share of the market for nuclear-plant outage work as a source of comfort for utilities thinking about ordering up fresh nukes. Energy and chemicals, the segment that builds refineries and petrochemical plants, is also hard at work on a polysilicon plant for Hoku Scientific (NASDAQ:HOKU).

The only clear disappointment was Shaw's environmental and infrastructure business, but even in that case, the news isn't so bad. The segment's EBITDA fell short of management's expectations, but the losses were mainly writedowns of non-core businesses, such as a joint venture with KB Home (NYSE:KBH). This segment, which continues to clinch contracts from corporate clients including Waste Management (NYSE:WMI) and General Electric (NYSE:GE), should turn in a better back half. A huge federal hurricane-protection project in Louisiana will move things in the right direction.

In all, Shaw Group appears to be on extremely solid footing as a power-plant builder. The rest is simply gravy.


Related Foolishness:

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
GE
$64.55 (-1.24%) $0.81
The Southern Company Stock Quote
The Southern Company
SO
$74.99 (-1.25%) $0.95
KB Home Stock Quote
KB Home
KBH
$27.20 (2.26%) $0.60
Exelon Corporation Stock Quote
Exelon Corporation
EXC
$41.67 (-0.02%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.