FWLT (MM)

A report released by the Commerce Department on Friday showed that construction spending rose in December. While the increase was driven by residential construction activity, non-residential construction activity also rose in December. The trend is likely to continue this year. For companies such as Fluor Corp. and Foster Wheeler this is an encouraging sign. According to the Commerce Department's figures, non-residential construction spending rose 0.3% in the month of December. The report also showed that year-over-year non-residential construction spending rose 1.2%.

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Private non-residential construction spending rose 1.8% in December and more than offset a drop in public non-residential construction spending. In fact, going forward public spending on construction is likely to remain a drag on growth. If the sequester goes into effect on March 1, 2013, then federal construction spending will see a reduction.

Private non-residential construction spending, meanwhile, is expected to remain strong as the U.S. economy continues to recover. In December, 10 of the 16 non-residential subsectors saw an increase in spending. One of the major drivers of construction activity going forward will be the oil shale boom in U.S. This is particularly encouraging for Fluor, which focuses on the oil and gas segment.

The Commerce Department report showed that spending on power projects rose 11.2% on a year-over-year basis in December. This is an encouraging trend for both, Foster Wheeler and Fluor.

The fiscal cliff deal reached at the start of this year has ended a great deal of uncertainty. However, the deal did not address the long-term spending cuts issue. Lawmakers now have less than a month to resolve the spending cuts issue otherwise automatic spending cuts will go into effect next month, hurting federal spending on construction activities. Overall, though, the improving outlook for the global economy is a good sign for the heavy construction industry.

Back in November, Fluor had raised the lower end of its earnings per share guidance for 2012 to a range of $3.60 to $3.80 per share. The company, however, was somewhat cautious in its outlook for 2013. CEO David Seaton said that while there continues to be a robust list of opportunities in oil, gas, petrochemical and infrastructure, the company's outlook for 2013 is tempered by the continuing weak global economy and the deferral of major mining capital programs. One must note that since Seaton's comments in November, the outlook for global economy has improved following some robust data from China and the U.S.

Foster Wheeler reported a 43% increase in its third-quarter net income in November last year, driven by the performance of its Global Power Group, which registered a sharp rise in EBITDA and very strong margins. The company also forecast in November that it expects 2012 earnings per share to be significantly higher than in 2011.

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