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Foster Wheeler Remains Neutral

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On Aug 18, we maintained our Neutral recommendation on Foster Wheeler AG . We appreciate the company’s better-than-expected earnings performance in the second quarter of 2013.

The company is expected to benefit from growing demand for energy and clients will continue to invest in new and upgraded capacity to meet that demand. However, we are concerned about the company’s power segment, which has been witnessing declining revenues due to lower orders.

Why the Reiteration?

On Aug 12, Foster Wheeler posted a 22% year-over-year increase in earnings per share to 54 cents in the second quarter of 2013. The results also exceeded the Zacks Consensus Estimate by a robust 63.6%.

Consolidated operating revenues in the quarter were $642 million, down 6.3% year over year. Strong growth in the Global Engineering and Construction group was fully offset by a steep decline in the Global Power group. Revenues were well below the Zacks Consensus Estimate of $866 million.

Following the release of the second-quarter results, the Zacks Consensus Estimate for fiscal 2013 increased 0.63% to $1.60 per share. Moreover, the Zacks Consensus Estimate for fiscal 2014 rose 0.5% to $2.02 per share.

Demand for energy will continue to grow over the long term and clients will continue to invest in new and upgraded capacity to meet that demand. In this regard, Foster Wheeler was successful in booking contracts for front-end engineering work, which is frequently the precursor to subsequent significant work for engineering, procurement and construction.

Further, Foster Wheeler is witnessing a growing need for capacity additions in a number of developing countries. There is often a preference for solid fuel boilers in these countries.

The company’s CFB technology continues to be its preferred solid fuel technology when a client has a hard-to-burn fuel or needs flexibility in fuel type. Foster Wheeler is an undisputed market leader in solid fuel flexibility, which provides it the competitive advantage in parts of the world that value and need this kind of power generation.

However, the demand for the products and services of the Global Power Group was negatively impacted during the quarter due to lack of boiler orders. Therefore, new orders (measured in terms of future revenues) received by the segment in the second quarter of 2013 was also significantly lower by 26% to $199 million compared with $268 million in the year-ago quarter.

Similarly, new orders in the segment were down 22.0% year over year to $89 million from $114 million. The decline was attributable to slippage of award dates for committed key prospects, which resulted in a lack of boiler orders. Foster expects the decline to continue through 2013 for the Global Power Group.

Other Stocks to Look For

Currently, Foster retains a Zacks Rank #3 (Hold).

Some other stocks that are performing well in the industry where Foster operates include Michael Baker Corp. , VSE Corp. and AO Smith Corp. (AOS - Free Report) . Michael Baker Corporation carries a Zacks Rank #1 (Strong Buy), while VSE Corp. and AO Smith Corp. carry a Zacks Rank #2 (Buy).

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