Inside Wall Street: Construction Giant Foster Wheeler Could Be Building a Rebound

Anything having to do with construction -- residential or commercial -- continues to be taboo with most investors. And that's leaving shares of companies in that group dormant, if not huge losers. Some analysts, however, are starting to divine that global engineering and heavy construction will come alive in the second half of 2010, which may presage a turnaround in some of the stocks in this soggy sector.

Already, shares of Foster Wheeler (FWLT), a global engineering and construction company that focuses mainly on the oil and gas and petrochemical industries, is finally showing some signs of life. The company, which relocated its headquarters to Switzerland in January 2010, provides design, engineering, construction and project management services. Analysts note that BP's (BP) disastrous oil spill in the Gulf of Mexico didn't significantly affect Foster's operations. The company also provides its services to the chemical, pharmaceutical and biotechnology industries.

Shares of Foster, which hit a 52-week low of $20 a share on July 6, 2010, have been gaining support on Wall Street in recent weeks. Watchers of the stock consider its July 26 rise to over $23, however modest, as a significant move (it closed on July 27 down 7 cents, at $23.57). The stock had traded as high as $35 last September. During Foster's burst of activity in 2008, the stock blasted up to more than $85 a share.

A Not-Yet-Palpable Upturn

Lately, Wall Street has had a definite change of heart toward the stock As of early this month, 15 of the 19 analysts who track Foster upgraded it to a buy, and none recommended getting rid of it. Four others tag it a hold. Why the optimism amid the continuing slump in housing and construction activity, and the weak pace of the economic recovery?

Some investors are betting that the heavy construction is signaling something that isn't yet quite palpable: An upturn in spending and orders reflecting rising demand for engineering and construction services worldwide, mainly in China, India, Australia and the Middle East. Demand from the U.S. and Europe is also expected to pick up as economic activity continues to recover.

What's happening in the global heavy construction activity is "typical of the late-cycle, post-recession fashion," when bookings for construction projects start accelerating, notes Barry Bannister, analyst at investment firm Stifel Nicolaus, who rates Foster a buy, with a 12-month target of $32. He notes that bookings of new projects have started to turn up in the second half of this year and should continue through the first half of next year.

The analysts forecast that Foster's earnings will start to rebound, to $2.28 a share in 2010 on revenues of $3.94 billion and further increase to $2.64 in 2011 on sales of $43.17 billion. Last year, Foster earned $2.96 a share on revenues of $5.06 billion.

Bulging Backlogs Bode Well

One factor behind the rise is the bottoming of costs in the corporate world, which Bannister believes has reduced the incentive for companies to delay any further construction projects in order to cope with the rising demand from their improving businesses. Bannister notes that the financial markets in the Middle East, in particular, have "reopened," which should boost the construction of new projects in the oil and gas industry in that region. He also notes that in Asia and other emerging countries, backlogs for new construction projects are bulging, which bodes well for more bookings from fresh projects.

Despite the lingering problems in the global economy, the long-term prospects for heavy construction activity worldwide appear to be brightening. "All of the markets in North America and around the world will eventually recover, no matter how bleak things may look at present," says Erik A. Antonson, analyst at independent investment research outfit Value Line.

He argues that in the U.S. and much of Western Europe, governments will realize they need to invest heavily in infrastructure improvements to keep up with many of the countries in the fast-growing Asia/Pacific region. Moreover, many corporate expansion projects that were in the works but had to be put off because of the recession will likely resume soon, he adds.

Still Too Early to Start Humming

Also upbeat is Stephen Fisher, analyst at UBS, who notes that this year's second half will see expanding bookings for engineering and construction services. And over the next 12 to 18 months, he says, the outlook will continue to remain positive, thanks to the rising level of order backlogs. The increasing demand is being generated by companies that have "excessive cash," says Fisher. So he expects the growth in international infrastructure projects will continue, especially in China and in the Middle Eastern countries with a lot of oil and gas activity.

Fisher, who recommends that investors have an exposure in the global engineering and construction industry, says his top stock pick in the group based on potential growth is Foster Wheeler.

It may be too early to expect the global heavy construction industry to start humming again, but the depressed stock prices of companies such as Foster Wheeler could easily start popping when interest in the sector starts to ignite.