Thursday, August 31, 2006

Calls of Note Part 2

- Stifel Nicolaus & Co visited with the senior management of Foster Wheeler (NASDAQ:FWLT) August 29 at their Clinton, New Jersey base of operations.

According to the firm, CEO Ray Milchovich, age 56, and CFO John LaDuc, age 63, are fighters, having worked for firms that experienced a combination of labor, competitive or cyclical troubles. Firm sought an understanding of how they would steer a business in a period of prosperity.

CEO Ray Milchovich, was the CEO of a Wisconsin steelmaker at age 29, and then CEO of Kaiser Aluminum, both of which ran into a combination of labor, competitive or cyclical troubles. As a result, the firm thinks he understands how to manage a business through adversity, and believes he has done a great job of turning FWLT around the past few years.

CFO John LaDuc, age 63, who was also at Kaiser before FWLT, seems a tough, devil-in-the-details type of financial chief, focused on cash flow, which is a change from FWLT's prior financial management.

Cash in excess of debt at 2Q06 was $138 million and the net asbestos liability was $79 million, down from $196 million in 2005. For almost 75 years, FWLT has seen its EBIT ROIC rise 50+% above WACC every 35 years, and the last such cycle began in the early 1970s.

Guidance is absent, but management expressed confidence about the backlog and margin. 2Q06 backlog and long-term historical burn rates suggest 3Q06- 2Q07 theoretical revenues of $4.15 billion (83% burn), up 63% y/y, versus firm's estimate of $3.45 billion, up 36% y/y, which may prove low.

All else being equal, if E&C segment margins stay at 15.5% through 2007, firm's 2006 EPS estimate would be $2.44 instead of $1.90, and 2007 would be $4.14 instead of $2.95. They're leaving estimates unchanged, because margins are high versus history, though not unusually so for strong commodity price eras.

Eestimates FWLT could have an EBIT ROIC of 20% to 40% for the 2006 to 2008 period, consistent with other high-quality E&C firms. At the low end of the industry P/E of 20x-25x 2007E, the firm derives a target price in one year of $63, unchanged from prior views, and rates FWLT Buy.

Notablecalls: This note may create some buying interest in FWLT in the coming days.

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