FWLT (MM)

We are reaffirming our Neutral recommendation on Foster Wheeler AG (FWLT). The company reported weak operating performance in the second quarter of 2012, with earnings and revenues declining 44% and 20% year over year, respectively.

The penalty of an adverse court decision, foreign exchange loss of $3.2 million and a quarterly delay in profit recognition from a recently signed agreement in the Global Power Group led to a loss in the reported quarter. However, Foster Wheeler witnessed an improvement in demand for its services globally, resulting in an increase of Scope backlog during the quarter.

The company received a number of small and medium-sized contracts during the quarter and is slowly executing its previous backlog. However, weak market conditions remain a matter of concern. 

The growing demand for energy globally, is expected to continue to grow over the long term and clients will continue to invest in new and upgraded capacity to meet that demand. In this regard, Foster Wheeler is successful in booking contracts for front-end engineering work, which is frequently the precursor to subsequent significant work for engineering, procurement and construction.

In the longer term, Foster Wheeler believes that the global demand for electrical energy will continue to grow and solid-fuel-fired steam generators will continue to fill a significant portion of this incremental generating capacity.

The fuel-flexibility of CFB steam generators enable them to burn a variety of fuels other than coal and produce carbon-neutral electricity when fired by biomass. In addition, the company’s steam generators can be designed to incorporate supercritical technology, which significantly improves efficiency and reduces emissions.

Further, Foster Wheeler is witnessing a growing need for capacity additions in a number of developing countries. There is often a preference for solid fuel boilers in these countries. The company’s CFB technology continues to be its preferred solid fuel technology when a client has a hard-to-burn fuel or needs flexibility in fuel type.

However, as the company’s operations are concentrated in four industries, including oil & gas, oil refining, chemical/petrochemical and power, it may be adversely impacted by economic or other developments in these industries. In addition, the company is subject to various environmental laws and regulations in the countries where it operates.

If it fails to comply with these laws and regulations, it may incur significant costs and penalties. The company’s business may be adversely impacted by regional, national and/or global requirements to significantly limit or reduce greenhouse gas emissions in the future.

Foster Wheeler currently has a Zacks Rank #3 which implies short term Hold recommendation on the stock.  

 
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