Fluor Corporation (FLR) and Jacobs Engineering Group Inc (JEC) are two large-cap names set to benefit from the recovery in nonresidential construction with their market exposure and large domestic projects, says Tahira Afzal, Director and Equity Research Analyst at KeyBanc Capital Markets Inc.
“Jacobs Engineering is considered a blue chip E&C name in the space in terms of risk and in terms of exposure to the petrochemical market. That is a fairly obvious name out there on the petrochemical side, and we also believe it is well-positioned,” Afzal said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Afzal also sees opportunities in Fluor Corporation, the largest publicly traded E&C company in the U.S. that now has several proposed domestic projects.
“Over the past few years, they have had a more international than domestic focus, but it is a company that is based on many large projects. In fact, they have some of the very large projects that are proposed in the United States, so they definitely are also active in the U.S.,” Afzal said.
Luxfer Holdings PLC (LXFR) has seen solid outcomes in its two quarters as a public company, with 20%-plus return on capital and solid growth opportunities in cylinders and industrial catalyst applications, says Mark L. Parr, Managing Director and Equity Research Analyst at KeyBanc Capital Markets Inc.
“This is kind of an unusual story. It’s a complex story, but I would say, just to summarize very simply, we think the valuation on this company — which is somewhat less than five times the enterprise value to EBITDA — is way out of whack with the company’s 20%-plus return on capital and well above average growth prospects,” Parr said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Parr says that though LXFR has had only two quarters in the books since they’ve been public, each quarter has seen solid outcomes. Additionally, the company has solid growth opportunities on the horizon in 2013 and 2014, Parr says.
“With some of the growth opportunities, in particular being cylinders for alternative energy for mobile applications, in terms of trucks and buses and cars, and also industrial catalyst applications that have a clear environmental solution and also a very good payback associated with them,” Parr said.
Allegheny Technologies Incorporated (ATI) may see double-digit upside from current levels, especially thanks to an expected recovery in the aerospace aftermarket and the global hydrocarbon and medical markets in the 2013 to 2014 time frame, says Philip Gibbs, Equity Research Analyst at KeyBanc Capital Markets Inc.
“[One name] we prefer in the specialty metals arena would include Allegheny Technologies, where we see 35% upside from current levels. I feel like most investors with this company focus heavily on the stainless steel exposure, which is a highly competitive market. However, we see them addressing those concerns and putting them to rest over the next 12 to 18 months as their new world class hot mill is commissioned,” Gibbs said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Gibbs says the company is trading inexpensively and earnings are on the lower end, and the verticals to which this builder is exposed are expected to see a bounce in the next couple of years, driving stock price.
“This is a company that’s very backward-integrated in a growing global titanium market and should benefit in 2013 and 2014 from a recovery in the aerospace aftermarket and the global oil and gas and medical markets. Allegheny is a company where we see earnings in the bottoming mode, something we like from a contrarian perspective. Valuation is on the lower end of normal,” Gibbs said.
MasTec (MTZ) builds energy infrastructure in the United States and has exposure to some of the fastest growing verticals in the industry, winning project awards in 2012 for its transmission business and also dominating in the midstream pipeline market, says Noelle Dilts, Vice President at Stifel, Nicolaus & Co., Inc.
“MasTec is little bit more diversified than Quanta, but about 20% to 30% of its sales are exposed to oil, gas and NGL pipelines, and this company actually has what we think is a dominant position in the shale midstream pipeline market, which is a very positive place to be right now. About 10% of the company’s sales are exposed to transmission, where it’s an emerging player, but it’s recently been winning a lot of work and has seen a number of major project awards in the second half of 2012. We believe they are gaining share in the transmission market,” Dilts.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Dilts adds that MTZ has about 17% of sales exposed to the wireless infrastructure construction, and its largest customer is AT&T (T), a wireless carrier poised to significantly invest in its network to support the proliferation of data usage, which should support strong growth over the next few years.
“The pipeline, transmission and wireless businesses are some of MasTec’s highest margin businesses, so the strong growth in these markets should drive a positive mix shift. MasTec’s only business with a weak outlook for 2013 is its wind farm construction business, which accounts for about 10% of sales and is the lowest margin business in the firm. We actually think that business could have a pretty strong bounceback in 2014 given the timing of the renewal of the wind tax credit,” Dilts said.
New Gold Inc. (NGD) is seeing considerable cash flow from production in its low-cost Cerro San Pedro, Mesquite and Peak mines, and the company expects a perpetual cycle of mine life and cash generation in the Peak mine, says Randall Oliphant, Executive Chairman and Director of New Gold Inc.
“Cerro San Pedro is an open-pit, heap-leach operation. It’s in Mexico. It gets a couple million ounces of silver a year as a byproduct which makes it our — before New Afton — our lowest-cost mine. It’s just a cash flow machine, and what we mean by that is, it cost about $90 million to build and generates about $150 million a year of cash flow,” Oliphant said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
New Gold‘s Mesquite mine is also an open-pit, heap-leach operation, and it has low sustaining capital with a mine life of over 10 years, whereas New Gold‘s Peak mine is showing a continuous eight-year life cycle, Oliphant says.
“[Mesquite] doesn’t have the silver as a byproduct, but what it does have is remarkably low sustaining capital. So while its costs are in the order of $700 an ounce, there really isn’t anything more to spend than that. It too generates a lot of cash,” Oliphant said. “[Peak] started up in 1992 with an eight-year life, and this mine seems to be almost perpetual because after 20 years of operations, it still has an eight-year reserve life and 2012 was just like other years where we more than replaced what we take out of the ground in terms of reserves every year. So it should also generate a lot of cash for us for a very long time.”
Reliance Steel & Aluminum (RS) is slated to acquire Metals USA Holdings Corp (MUSA) in the second quarter of 2013, adding $2 billion of annual sales to its income statement with synergies up to $30 million, says Arun Viswanathan, Senior Equity Analyst at Longbow Research.
“More importantly, this acquisition will be immediately accretive upon closing in the second quarter. We estimate the accretion to be anywhere from $0.25, which assumes no synergies up to $0.50 or $0.60, which assumes $20 million to $25 million of synergies, which is relatively conservative,” Viswanathan said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Management at Reliance has targeted at least $10 million of synergies for the Metals USA acquisition, but that is only a corporate cost removal amount, and Viswanathan believes that growth in both businesses and procurement cost savings could push synergies even higher.
“I think that if they are able to increase their depth of relationship with certain customers and continue to grow their Metals USA and Reliance business, and further obtain procurement — steel-buying — cost savings, I think total synergies could be closer to $25 million or $30 million, in which case accretion would be $0.50 to $0.60 of EPS on annual basis,” Viswanathan said.
Foster Wheeler AG (FWLT) lagged some of its peers in backlog growth due to its primary exposure to the downstream side of the petrochemical chain rather than the upstream, but Robert F. Norfleet, Managing Director and Senior Equity Research Analyst at BB&T Capital Markets, says this exposure may result in opportunities going forward.
“The reason we like the company is because if you look at their end markets both in petrochemical and international refinery, we think that there’s significant opportunities for the company to book very meaningful work, and we have seen them do this over the last two quarters. In addition, we think they are going to increase their exposure into the upstream oil and gas market,” Norfleet said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Norfleet says Foster Wheeler recently was awarded a contract to build a refinery in Venezuela, and the company may expect to participate in North American natural gas and oil construction.
“We also expect that they are going to participate in the North American LNG and petrochemical buildout, but unlike some of the other companies I follow, they are not yet seeing accelerating earnings and better margins. We believe Foster’s going to actually have a flat to down year in 2013 before showing what we think will be a nice lift in 2014, so it is just more of a later cycle way of playing this investment thesis,” Norfleet said.
Carpenter Technology Corporation (CRS) has 45% exposure to the aerospace industry and about 20% to the oil and gas industry for its specialty metals business, standing out among metal providers thanks to their highly differentiated and diverse product base, says Arun Viswanathan, Senior Equity Analyst at Longbow Research.
“What we like on Carpenter is they really changed their product profile and really focused on what they deem as premium and ultrapremium type of products, so within metals, they’re going after niche applications of high nickel-based alloy applications and stainless steels that are geared toward aerospace and oil and gas for growth markets, and they have 10,000 SKUs, and so there is a lot of product differentiation and that has typically allowed them to hold on to more pricing power versus more commodity-oriented products in titanium and stainless steel, which is a greater portion of ATI and RTI‘s sales,” Viswanathan said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Viswanathan rates CRS a “buy,” and he says the company’s acquisition of Latrobe will result in synergies and increased productivity. He adds that there is some new capacity coming online in a couple of years, which he says will increase CRS‘s presence in the premium and ultrapremium market.
“The last thing I’d mention on Carpenter is that currently it’s trading at 11 to 12 times consensus 2014 numbers, which is very attractive versus ATI at 16 times and RTI actually at over 20 times p/e multiple. Because of their 45% exposure to aerospace, we think that the multiple for Carpenter should be more like 16, 17 times 2014, and that would put that stock in the low 60s or so — so we see lot of the upside there,” Viswanathan said.
Great Lakes Dredge & Dock Corporation (GLDD), the largest dredging company in the U.S., will see significant opportunities during the expansion of the Panama Canal through 2015, says Jack Kasprzak, Managing Director and Senior Equity Research Analyst at BB&T Capital Markets.
“They have about 40% market share. It’s not leveraged to the traditional end markets of construction…because it operates a bit differently than many construction companies,” Kasprzak said. “The theme for Great Lakes Dredge & Dock is that the Panama Canal is being expanded.”
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Kasprzak says that the expansion of the Panama Canal will push most East Coast ports in the U.S. to expand and upgrade, positioning GLDD well through 2015.
“It looks like most of the East Coast ports in the United States need to be expanded and upgraded to accommodate the larger container ships that will come through the new Panama Canal. That situation is creating significant opportunities for Great Lakes Dredge & Dock, so they are also well-positioned,” Kasprzak said.
Nucor Corporation (NUE) is holding up its history of delivering value to shareholders with a 3.14% dividend and investments in scrap enhancement technology that improves NUE‘s earnings power on annual basis by almost $0.45 a share, says Shneur Gershuni, Executive Director at UBS Investment Bank.
“Because of cheap natural gas prices, Nucor will be turning on a DRI facility later this year. This facility basically allows you to take iron ore pellets with natural gas and produce an output that has a very high ferrous content, which is needed to make steel. That’s what a traditional blast furnace does — they take iron ore and coking coal together to create their steel. Nucor is basically using this technology and taking advantage of cheap natural gas prices to achieve it,” Gershuni said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
The new technology will lower NUE‘s input costs, improving the company’s earnings power on an annual basis and positioning NUE to perform well for shareholders in addition to its 3.14% dividend, Gershuni says.
“This scrap replacement will lower input costs, which effectively improves their earnings power on an annual basis, by our calculation, by almost $0.45 a share. Nucor is starting it up this year, and there is usual ramp and so forth, and we estimate it will generate $0.17 this year. The point is that its investments have been made during the recession, investing in the company and improving its capabilities and earnings power for a given price for given steel and scrap pricing,” Gershuni said. “Both Nucor and Steel Dynamics actually offer you a pretty nice dividend these days, with Steel Dynamics at 2.83% and Nucor at 3.14%. Not bad when you compare that to the S&P 500.”
