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We are introducing Jefferies Equity Research coverage of the
Engineering and Construction Sector.
Key Points
• Supply and Demand More Balanced. We believe that the
overheated demand for engineering contractors driven by credit
and commodity price expectations has cooled to allow a more
balanced outlook. Current backlogs appear supportive of 2009
revenue growth.
• Capital Deferrals Could Push Out 2H09 Orders. However, the
decisive capital deferral, production cutback and cash flow
maximizing decisions made by global commodity and industrial
companies during the past three months create an added level of
new order uncertainty.
• Monetary and Fiscal Stimulus Help, In Different Ways. The
global central banks efforts to reflate should eventually aid an
economic and commodity recovery in 2010. Near-term fiscal
stimulus in U.S. and Emerging Economies should support business
levels for some contractors.
• Long-Term Commodity/Energy Structural Deficits to Drive
Business. The underinvestment of the 1980s and 1990s has led to
a more robust capital investment trend during the past six years.
We expect client capital investment to resume as prices and
economies normalize, but with higher return requirements.
• End Market Diversity and Balance Sheet Provide Competitive
Advantages. Given the uncertainty surrounding near-term client
capital budgets, we believe E&C companies with a more diverse
product and end market offering should better weather the current
marketplace. We note financial profiles are quite strong from most
global contractors.
• Recommendations: We suggest investors look at leading,
well-capitalized companies with enough diversity to offset possible
cyclical deferrals. We introduce coverage of Fluor (FLR) and
Jacobs Engineering (JEC) with a Buy rating and Chicago Bridge
& Iron (CBI) with a Hold rating.
• Risks: Our investment thesis would be at risk if a longer than
expected period of below-trend commodity prices, more severe
global recession, lack of defined project execution success, or
restrictive global trade emerged.
January 23, 2009
Industrials
Engineering & Construction
United States of America
Industrials
E&C: A Pause to Refresh the Long Cycle
Investment Summary
We believe the supply/demand of global projects and contractors
appears more balanced than the excess demand for contractors
witnessed during the past two years. Diverse end market exposure,
balance sheet strength and reflationary policies should allow for
shareholder value recovery, on balance.
Michael S. Dudas, CFA
(212) 284-2383, mdudas@Jefferies.com
Kalpesh H. Patel, CFA
(212) 284-2006, kpatel@Jefferies.com
Table of Contents
Executive Summary 3
Valuation 5
U.S. E&C Equity Share Recommendations 6
Risks 6
U.S. E&C Equities Overviews – What Drives Performance and Sentiment 9
E&C Company Summaries 13
Chicago Bridge & Iron 13
Fluor 14
Jacobs Engineering 15
E&C Industry Fundamentals 16
Important End Market Snapshots 21
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