Is Foster Wheeler Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Foster Wheeler (NASDAQ: FWLT) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Foster's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Foster's key statistics:

FWLT Total Return Price data by YCharts

Source: YCharts.
*Period begins at end of Q2 2010.

FWLT Return on Equity data by YCharts

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we're going
Things don't look good at all for Foster Wheeler today -- the global engineering and construction firm musters only one out of seven passing grades. However, despite weakness on virtually every important metric, Foster Wheeler shares are actually higher today than they were three years ago, thanks to a rebound that began this past spring. Is the company's stock-price growth sustainable, or will Foster's fundamental weaknesses catch up it to the end? Let's dig a little deeper to find out.

The energy-focused Foster Wheeler once saw robust growth on the back of booming energy industry, but these trends have turned at present, thanks in part a wholesale move away from nuclear power after Japan's Fukushima disaster. However, countries such as China, India, and Russia have heightened their investments in nuclear production, which could be a long-term growth headwind for Foster once the new plants are approved. Fool contributor Jonathan Yates points out that Beijing aims to produce 80 gigawatts of nuclear power by 2020, and India expects to obtain almost a quarter of its energy from nuclear power by 2050.

In the nearer term, Foster Wheeler recently got a contract to supply materials for nine fired heaters for a new high-octane gasoline plant in Kirishi, Russia. It also signed a three-year agreement with the Abu Dhabi Polymers Company to provide engineering and consultancy services.

Foster Wheeler has also been on the acquisition path and recently bought Canadian firm Three Streams Engineering, which has helped it to bolster its position north of the border. The company has bagged a contract to render engineering and procurement services to Reliance Industries for a multibillion-dollar Indian refinery project, and has a similar agreement with OJSC for a Russian refinery. The company's Global Power Group has achieved similar success in international markets, thanks to contracts from Elektrobudowa and GS E&C for two separate large power plants. The company also signed an agreement with Shell Global Solutions International, a subsidiary of Royal Dutch Shell, to offer full support for Shell's operations. These deals might help the company recover, but it seems that Foster's long-term health will be tied to the health of the global economy -- particularly if the economy continues to rely on non-renewable energy.

However, Foster Wheeler is hardly alone in the international megaconstruction market: both Fluor (FLR 2.28%) and Jacobs Engineering (J 0.36%) present significant competition. You can see how that competition has affected Foster in recent years:

FWLT EPS Diluted TTM data by YCharts

Foster and Fluor have been in a race to the bottom, in terms of profit, but Jacobs Engineering has taken off lately, thanks in part to a larger reliance on government contracts, which have been flowing freely in the post-crash years as many international governments look to juice economic growth with higher spending. Despite that discrepancy, Fluor has outpaced both companies in share-price appreciation over the past three years, returning nearly 90% compared to Jacobs' 65% and Foster's 30%. Its P/E ratio is also the highest of the bunch, at a 40% premium to either Jacobs or Foster. Of the three, only Jacobs Engineering has not spent the past year rising on valuation alone -- its P/E is the same as it was in 2010 -- and both Foster and Fluor have seen their valuations double. It might be worth considering the possibility that these stocks haven't much higher to go without an appreciable gain on the bottom line.

Putting the pieces together
Today, Foster Wheeler has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.