The last time investors caught word of Shaw Group's (NYSE: SGR) quarterly results, they enjoyed a nice group hug. Yesterday's market reaction was a bit tougher to tease out, but the contractor's first-quarter numbers and outlook for the rest of fiscal 2008 were both solid.
To evaluate Shaw's numbers, it's important to back out the results of nuclear power specialist Westinghouse, an equity investment whose financial contribution is accounted for below the operating line. Excluding Westinghouse, revenue soared more than 30%, thanks largely to growth in the fossil and nuclear power segment. Because of big contract wins from utilities like Entergy (NYSE: ETR), this part of the business accounts for nearly half of Shaw Group's $14 billion order backlog. Firm-wide EBITDA increased more than two and a half times, and earnings more than quadrupled.
The company didn't simply build more stuff. It enhanced its overall profitability as well, despite the refining segment's projects being in an early stage. Contractors like Shaw Group, Chicago Bridge & Iron (NYSE: CBI), and Foster Wheeler (Nasdaq: FWLT) recognize profits on big projects as they move toward completion, while overhead costs never go away. That's why, in accounting land, there's a profitability lag during the preliminary engineering phase.
Aside from a stagnant backlog, one of the few negative comparisons in the report was operating cash flow. This was a tough one, because last year, Shaw was still recognizing a big chunk of revenue from post-Katrina recovery work. Still, the cash flow number was nothing to complain about. With a forecast of more than $400 million for the full fiscal year, the stock looks quite reasonably priced at a modest 12 times forward operating cash flow. Management expects ongoing strength in the company's various end markets, adding to my comfort with the valuation.
