Normally, a third straight quarter of beating Wall Street estimates is cause for happiness. Not so yesterday for engineering and construction company Shaw Group
The culprit? The company announced a share offering of at least 12.5 million shares -- and possibly as many as 14.4 million if the overallotment is exercised. Although the money is being raised for a worthy purpose -- tendering for the company's 10.75% coupon bonds -- the offering represents potential dilution of more than 20% for existing shareholders.
While the market for the large-scale construction projects in which Shaw specializes hasn't really picked up much yet, the company did all right in the February quarter. Sales were up about 11%, while operating income climbed nearly 35%.
On a more worrying note, the company's backlog shrank for the third-straight quarter to about $5.1 billion, with $2.4 billion of that expected to be realized in the next 12 months. Nothing about the backlog is terribly surprising, though, since environmental and infrastructure work makes up a little more than half of the total, and roughly 20% of the total is for various nuclear power projects.
During the conference call, management mentioned that the SEC's informal inquiry is still ongoing but offered no additional details.
Looking ahead, the tender offer for the debt may prove to be an underappreciated aspect of the company's growth strategy. Companies must often provide letters of credit to secure engineering/construction contracts, and it is very possible that the company's balance sheet has at least somewhat hampered management's ability to secure business.
With a cleaner balance sheet and a new $400 million line of credit, though, the Shaw Group should be on better footing when it faces competitors like Washington Group
Looking a bit further ahead, there should be some growth potential for this industry. Not only are utility companies likely to build more power plants, but there is also increasing pressure on them to add scrubbers and other environmental enhancements -- something that Shaw does very well. Elsewhere, demand from the chemical, infrastructure, and maintenance markets should all be able to deliver growth for Shaw in the coming years.
Of course, words like "should" and "potential" are problematic. The projects in which Shaw engages are expensive, and we've already seen many companies and governments drag their feet on projects that would otherwise seem necessary. Nevertheless, many of these projects have to be built someday -- unless we all decide that we can live without power, fresh water, roads, and the like -- and Shaw should be in position to get its share.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).