Foster Wheeler's Earnings Were Horrible, Just Ignore Them

The market continues to prove that it's forward looking. Before the market opened, Foster Wheeler (FWLT) reported a decent revenue and profit miss. So is the stock down 5, 10 or even 20%? Actually NO! FWLT is up over 5% today. Naturally helped by the huge rally in the overall markets today.

How could a company that just reported another disappointing quarter have such a bright day? Actually pretty easy. First, they announced a re initiation of the stock buyback program and a Q3 purchase of 4.3M shares for nearly $100M. Combine that with $500M more in the pipeline and only a $3.2B market cap this adds up to nearly 20% of the float. Second, the company announced that they've signed 2 major deals in the first part of Q4 and see a further pick up in orders. For a company like FWLT, orders typically trump current period earnings as proxies for the stock price.

Another issue was the recent departure of the CEO. The stock initially sold off following the announcement of his departure in October. Ironically the company greatly lagged under his leadership so it was odd that the market sold off on his departure. True, it signaled that Q3 results might be weak, but it also meant that the BOD wasn't going to keep holding a losing hand. Better to fold now and play the next hand.

One thing most investors these days get hung up on are whether companies beat or miss earnings estimates. Not enough focus on balance sheets, book value, enterprise values, and even the old popular price to earnings ratio. Even in a weak environment, FWLT will report nearly $2 in earnings this year providing for a 12 PE. That is typically on the low end of historical valuations. Not to mention that we're talking trough earnings with a high likelihood of a return to earnings in excess of $3 or even $4. On top of that, they also have over $1B in cash with no more then $200M in debt. The buyback is easily supported by the balance sheet and cash flow estimates.

FWLT is a core holding of our Opportunistic and Growth Portfolios. FWLT along with TEX will be 2 of the big gainers in 2011. Construction has been a lagging sector that has finally turned the quarter. Both stocks have lagged the overall market and should play catchup in the next 12 months.

Via Earnings Presentation:


  • Excluding one-time items, earnings of 40 cents per share fell short of the 51 cents per share that analysts had on average forecast, according to Thomson Reuters I/B/E/S.
  • The amount of activity regarding proposals and client inquiries in many regions of the world has returned to levels that we had not consistently seen since markets turned down
  • Selected to execute a major front-end engineering design contract for a very large downstream project in South America
  • Very large award for design and supply of two 300 megawatt state-of- the art pulverized coal steam generators for client in Vietnam
  • Scope Backlog Reached Its Highest Level in Q3 Since Q2 2009 and Is Expected to Increase Further by End of 2010

2011 Preliminary Outlook 

  • Likely to see decline in EBITDA margins in both operating groups versus full-year 2010

  • If proposal activities and client inquiry levels continue to remain high, we could very well could see an increase in scope revenues versus full-year 2010

Disclosure: Long FWLT and TEX


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