Two Deeply Undervalued Industrials

 | Jul 31, 2012 | 11:30 AM EDT
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Chicago Bridge & Iron's (CBI) acquisition of Shaw Group (SHAW) generated a lot of buzz from the financial punditry yesterday, especially given its 60%-plus acquisition premium. It also shined the spotlight on the beaten-down and unloved construction and engineering sector.

I have been thinking for some time that stocks in this sector are deeply undervalued from a long-term perspective, given that many of them are selling at minute fractions of their annual revenue, among other value metrics. Here are two very cheap plays in this area that deserve higher valuations.

URS (URS) provides engineering and construction services to public agencies and private-sector clients worldwide. About 50% of its revenue comes from state, local and federal government agencies.

Here are four reasons URS offers long-term value at under $35 a share:

  • The median price target on the stock by the 16 analysts who cover the stock is $49.50 a share. Standpoint Research and Imperial Capital also initiated the shares as Buy and Outperform in the second quarter.
  • URS is selling at the bottom of its five-year valuation range, on the basis of price-to-book, price-to-sales and price-to-earnings. It also sells for 27% of annual revenue, just under what Shaw was selling for before its big buyout offer.
  • Consensus earnings estimates for fiscal 2012 and fiscal 2013 have moved up 5% to 7% respectively over the past three months.
  • The stock is dirt cheap at just 77% of book value and just over 7x forward earnings. URS also pays a nice dividend of 2.3%.

Foster Wheeler (FWLT) operates as an engineering and construction contractor and supplier of power-generating equipment worldwide.

Here are four reasons why Foster Wheeler is a bargain at under $18 a share:

  • It has a robust balance sheet with almost $500 million in net cash on the books (about 25% of its total market capitalization).
  • Foster Wheeler is selling near the bottom of its five-year valuation range on the basis of price-to-sales, price-to-earnings, price-to-book and price-to-cash-flow. The median price target on the stock is $30. Credit Suisse has an Outperform rating on Foster Wheeler and a price target that's almost double the current stock price at $34 a share.
  • Revenue should resume in fiscal 2013 with a projected sales increase of around 9%. Earnings are also going in the right direction. The company earned $1.43 a share in fiscal 2011 but is expected to earn $1.80 a share in fiscal 2012 and $2.18 in fiscal 2013.
  • The stock is cheap at just over 8x forward earnings, a minuscule five-year projected price/earnings-to-growth (0.41) and 44% of annual revenue.

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