MKM Partners Updates E&C Coverage Post Election - (CBI), (FLR), (JEC)
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Two weeks following the 2016 presidential election, MKM Partners' engineering and construction coverage has seen an average jump of 20%. Investors have shifted into industrial, energy and mining, with the expectation of the government to award more contracts to these areas under a Republican administration.
"Our broad E&C coverage has outperformed strongly since the election results, up an average of 20% in our coverage versus the S&P500 up 2.1%, as investors have shifted into industrial, energy and mining." MKM analyst Daniel Scott commented. "In general, we are raising our target multiples on our valuation year of 2017 to be reflective of our expectations for higher awards moving forward in government, defense, energy and infrastructure. We believe investors should be more willing to pay premium multiples on forward year earnings given that improved bidding environment outlook beyond 2017."
Engineering and Construction company's covered by MKM include:
Chicago Bridge & Iron (NYSE: CBI) (Buy) - MKM partners is maintaining a $43/share price target for CBI. The company continues to have the overhang of a pending court ruling on its $2 billion lawsuit with Westinghouse. Sentiment around investors has been leaning towards the expectation that the court will send the case down to arbitration instead of ruling now on contract law. MKM cautions investors against overreacting to such a potential ruling, as CBI would have the opportunity to argue contract law at arbitration and apparently would have the recourse of appealing to the same judge currently considering the case should the arbitration result be less than favorable. However, once the company is able to get past this binary event, investor attention should turn to the strong cash flow story and corresponding balance sheet de-levering. Management has steadfastly guided this year to cash flows from operations exceeding net income, and that trend is expected to continue.
Fluor Corp. (NYSE: FLR) (Neutral) - FLR recently released initial 2017 guidance of $2.75 - 3.25/share on their 3Q earnings release and followed it up with an investor day in New York. Fluor has long been the blue chip name in the space, but has had a rough 2016 with multiple downward guidance revisions followed by a major loss on its CPChem ethylene cracker project. It also saw roughly $5 billion of projects drop out of backlog for projects that have been suspended, which should correspond to a de-risked backlog. The company continues to enjoy a strong balance sheet and cash position, along with great diversity across end markets. MKM raised the target multiple to 17x from 15x to reflect the more constructive outlook for many of their key markets as the new administration takes over, resulting in a higher $51/share fair value objective compared to $45/share previously.
Jacobs Engineering (NYSE: JEC) (Neutral) - MKM raised the fair value estimate for JEC to $57/share from $49/share, and continues to be impressed with JEC's repeat business win rate and diversified end market exposure. Revenues are evenly balanced across their four main segments, with profit skewed a bit more towards Buildings & Infrastructure and Aerospace & Technology.
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