I'm afraid that investors have lulled themselves into a false sense of security regarding the various engineering, procurement, and construction (EPC) contractors. Global infrastructure boom? Of course -- no-brainer!
Well, URS (NYSE:URS) shareholders got their security blankets snatched away this week. As with other decoupling theories, the notion that U.S.-exposed EPC folks like Jacobs Engineering (NYSE:JEC) and Chicago Bridge & Iron (NYSE:CBI) are insulated from a housing-led downturn is crumbling. Just like America's infrastructure.
URS management noted "budget shortfalls and deficits facing many state and local governments," which may put a serious damper on infrastructure spending over the next year or two. For example, in the firm's 12 key states, 2008 spending is projected to grow only 3.4%, versus 10.2% last year. California and Florida should be particularly hard-hit, partly because of housing hokum.
Much like Shaw Group (NYSE:SGR), URS will be sheltered to some degree by its serious nuclear-power position. URS doesn't break out its backlog by segment, but this book of business has clearly enjoyed a boost from the firm's recently finalized acquisition of Washington Group. To name but one project, URS is overseeing the construction of a new uranium enrichment facility, which will go toe-to-toe with the American Centrifuge Plant being built by Fluor (NYSE:FLR) for uneasyUSEC (NYSE:USU).
Outside the power sector, URS also counts industrial giants like BHP Billiton (NYSE:BHP) as clients. Finally, there's the federal government, which accounted for more than 40% of revenue in 2007. In short, there are several factors cushioning URS from near-term infrastructure indigestion. That said, past downturns have not been kind to this group, so take care with your EPC investing.
Related Foolishness:
- Fellow Fool David Lee Smith sees some real opportunities in the sector.
- The nuclear industry faces an alarming problem.
