Two Energy Infrastructure Plays

 | Oct 08, 2012 | 11:30 AM EDT  | Comments
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Stock quotes in this article:

kbr

,

flr

With Standard & Poor's predicting earnings to be down year over year for the first time since the end of the recession in 2009, as well as growing concerns about slowing worldwide growth and demand, investors should look to areas where growth is likely to remain strong. One of those areas is companies involved in the worldwide build out of energy infrastructure. North American energy production is expanding faster than it has in a generation. In addition, the Middle East and Africa are predicted to plow $740 billion into new energy projects over the next five years after putting off development during the financial crisis. Not only do these regions need new infrastructure to increase exports, they must satisfy the energy needs of their increasingly energy-hungry populations. Here are two companies that are likely to be in the middle of this robust demand. Their stocks have reasonable valuations and these companies have solid balance sheets, as well as growing backlogs.

KBR (KBR) is a global engineering and construction services company. It is involved in heavy construction projects such liquefied natural gas and gas-to-liquids facilities.

Four reasons KBR is a solid bargain at just over $30 a share:

  • As of the last quarterly earnings report, the company reported a backlog of $15.3 billion vs. $12 billion year over year, 165% of 2011's total revenue.
  • KBR has a robust balance sheet with more than $700 million in net cash on its books (around 15% of total market capitalization). It has been able to raise its operating margins two full percentage points over the last two years (12.8% vs. 10.8%).
  • The stock sells for just 10x forward earnings, a discount to its five-year average (14.0), and analysts expect 10% revenue growth in 2013.
  • The twelve analysts that cover the stock have a $40 price target, 30% above its current stock price. Credit Suisse has an Outperform rating and a $48 price target on the stock.

Fluor (FLR) provides design, engineering, procurement, construction and project management services to upstream oil and gas production, downstream refining, chemicals and petrochemicals industries, as well as other industrial projects worldwide.

Four reasons FLR is undervalued at $57 a share:

  • Like KBR, Fluor has a solid balance sheet. It holds over $1.7 billion in net cash on its books (approximately 20% of market capitalization). It also pays a small dividend of 1.1%.
  • The company has beaten earnings estimates each of the last three quarters and is priced at just 13x forward earnings, which is below its five-year average (17.3).
  • Backlog continues to grow. At the end of the last reported quarter, it stood at $43 billion, a nice jump from the $39.5 billion figure it reported at the end of 2011. The company is on track for almost 20% revenue growth in 2012 and analysts have approximately 10% sales increases projected for 2013.
  • The median analyst price target held by the 19 analysts that follow the stock is $72 a share.

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