Inside Wall Street: Shaw Group shines

This leader in industrial piping systems and engineering services is favored as a nuclear energy play.

By Gene Marcial May 23, 2012 10:41AM

As Shaw Group (SHAW) prepares to sell its energy and chemicals unit to France's Technip, some investors expect the move will unlock the value of the company as a leader in nuclear plant design and construction for which global demand is starting to ramp up.

 

Shaw is a Louisiana-based major provider of engineering, procurement and construction services to both regulated and unregulated utilities, particularly for nuclear and fossil fuel generation projects. It also provides services in air quality control installations.

 

Shaw recently agreed to sell its energy and chemicals business, about 10% of its revenues, to French oil services company Technip for $300 million. Shaw boosted its earnings per share guidance for 2012 by 15 cents a share.


Scheduled to close in August 2012, the sale is expected to enable Shaw focus on its core growth businesses, including its nuclear power services, which currently generates about 36% of the company's revenue from markets that include the U.S., China, and Europe.


Shaw is uniquely positioned to benefit from global demand for nuclear power over the next decade as the industry leader in nuclear plant design and construction through its previous investment in Westinghouse, developer of the AP 1000 nuclear  reactor.


Westinghouse and Toshiba, which owns 67% of Westinghouse, gives Shaw exclusive opportunities by providing services for new Westinghouse and Toshiba reactors worldwide. Shaw also provides maintenance services at about a third of the 104 operating nuclear reactors in the U.S.

 

Shares of Shaw have been a disappointment so far, trading at $26 a share, down from $30 on April 30, 2012. The stock, which traded as high as $37.29 a year ago, has suffered when the company posted a loss in 2011. Revenue fell to $5.9 billion from 2010's $7 billion, largely due to the nuclear disaster in Japan in March 2011.


"While recent results have been poor, there are things to like about Shaw, as fiscal 2011's problem projects are nearing completion," says Andrew J. Wittmann, analyst at investment firm Robert W. Baird, who currently rates the stock as "neutral."

 

He notes that new power generation remains a late-cycle market with significant opportunity ahead. Also, the long pending  Environmental Protection Administration rules "will likely help unlock pent-up capex [capital expense] demand as regulatory clarity emerges," says the analyst. Shaw sees tremendous opportunity in the $55 billion U.S. power generation market, notes Wittmann.

 

Shaw controls about 50% of the North American pipe fabrication market, particularly for new power plants, says Wittmann. Also, roughly half of Shaw's business is related to projects where it performs the engineering, procurement and construction work, which gives it an advantage over its peers. Shaw's fabrication and manufacturing business generates high margins, he notes.  


However, the analyst is neutral on the stock in part because he believes Shaw could have negotiated a better deal for its energy and chemicals unit. The positive side, says Wittmann, is that the sale, combined with an expected deal to sell its minority interest in Westinghouse, should "paint a clearer picture of Shaw's future earnings and balance sheet, which we believe should reduce risk over time."

 

An analyst who is bullish and rates Shaw as a "buy" is S&P Capital IQ's Stewart Scharf, who has a stock price target of $35 a share. He says his "buy" recommendation is based on a "more positive outlook for nuclear projects in the U.S., China, and other regions of the world, combined with favorable natural gas trends -- along with our valuation metrics."

 

Furthermore, says Scharf, Shaw's plan to sell its 20% stake in Westinghouse back to Toshiba will eliminate $1.7 billion of debt, making  the company debt-free. And the pending sale of its energy and chemicals unit to Technip is expected to produce a 15-cent-a-share boost to 2012 earnings. He forecasts Shaw will earn $2.15 a share in 2012, and $2.75 in 2013.

 

"We see a pickup in revenues in fiscal 2013 (ending Aug. 31), driven by new awards for nuclear power plant and gas projects, and more favorable  trends in plant services for domestic nuclear uprates," says Scharf.


He also expects a rebound in environmental and infrastructure projects as new mercury emissions regulations force coal companies to upgrade conditions in their plants. Another positive, says the analyst, is Shaw's expanded fabrication and maintenance operations in the Middle East and Brazil, which he expects should generate increased revenues.

 

In China, Shaw and Westinghouse jointly built four nuclear power plants for an estimated $5 billion. Despite global concern in the wake of the nuclear disaster in Japan, says Scharf, "we believe Shaw is well positioned to benefit from a growing trend toward nuclear energy, as Westinghouse technology has been used in 60% of the 104 U.S. licensed nuclear reactors, and 48% of the world's 436 operating reactors." He notes that Shaw provides systemwide maintenance and modification services to 44 nuclear reactors in the U.S.


Gene Marcial wrote the column “Inside Wall Street” for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

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