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Foster Wheeler Cut to Underperform

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On Mar 8, we downgraded engineering and construction company Foster Wheeler AG to Underperform based on the company’s dismal fourth quarter results and disappointing outlook for full year 2013.

Why the Downgrade?

Estimates for Foster Wheeler have been declining ever since its fourth quarter results on Mar 1. Foster Wheeler’s fourth quarter revenues and EPS of $735 million and 38 cents missed the Zacks Consensus Estimates of $1 billion and 46 cents, respectively. For the full year 2013, the company expects adjusted diluted earnings per share to be flat to marginally down compared to 2012.

Following the release of the fourth quarter results, the Zacks Consensus Estimate for 2013 has gone down 25.8% to $1.52 per share. The Zacks Consensus Estimate for 2014 has also declined significantly (down 12.1% to $2.03 per share). With the Zacks Consensus Estimates for both 2013 and 2014 going down, the company now has a Zacks #5 Rank (Strong Sell).

Cause for Concern

Power generation markets globally continue to be weak. Unstable environmental regulations in Europe and a similar situation, coupled with low natural gas prices, in the U.S. also have delayed or impacted the retrofit markets. In addition, the markets for renewable power have also been low in many regions due to overbuilding during the past decade and the current government unwillingness to continue subsidization.

Given the fourth quarter performance and the challenging outlook, we fail to see any significant catalyst that could drive the shares in the near term. Gross margins will also remain under pressure.

With the negative sentiment continuing, the Zacks Consensus Estimate for the first quarter also has gone down 28.9% to 32 cents.

Engineering & Construction Stocks That Warrant a Look

While we prefer to avoid Foster Wheeler until we see signs of improvement in the company's performance, other engineering & construction stocks worth a look are Aecom Technology Corporation. (ACM - Free Report) and Chicago Bridge & Iron . Both are Zacks #2 Rank (Buy) stocks. Another competitor Fluor Corp. (FLR - Free Report) has good prospects but carries a Zacks Rank #3 (Hold).

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