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Monday, July 10, 2006

A Glass Half-Full Look on Shaw Group

Shares of Shaw Group (SGR) are down 16% to $21.50, but shares had been as low as $20.00 after the open. It reported a net loss after items narrower than the same quarter last year, but the results were not what the street wanted. It also disclosed a restatement to prior revenues due to clerical errors, and that tends to drive the street nuts.

Shaw reported a quarterly net loss of $16.7 million, or -$0.21 earnings per share, narrower than the prior-year quarterly loss of $21.7 million, or -$0.31 per share. Revenues were Up 38% to $1.23 billion from $891 million in the year earlier period. Excluding a $29.2 million after tax charge for a legal settlement, net income would have totaled $12.5 million, or $0.16 per diluted share.

The company disclosed that it would restate prior results lower by $3.5 million due to weak internal controls allowing a clerical error in revenue calculations.

There was an interesting call out of JPMorgan. Just last week the firm removed its Overweight rating and downgraded the shares to a Neutral. They expected limited upside and noted that they likely had not reached the full value of their FEMA business, as well as it taking longer to collect on that business.

The problem with FEMA business is that it is hard to count on regular natural disasters and emergencies, although if you believe that global warming (or climate change for the P-C wording) will make disasters and emergencies more frequent then this is one of the expected beneficiary companies. Another problem many companies have had in dealing with FEMA is that they are often very slow paying, and it is pretty difficult to collect when disputes arise. The company did say that revenues from emergency response and disaster relief work were less than anticipated, as certain task orders totaling in excess of $100 million were cancelled. These operating results in the Energy & Chemicals unit were lower than expected primarily because of adjustments to our cost estimates during the completion and performance testing phase on a domestic EPC power plant project; and its unfavorable ruling in the known AES Wolf Hollow claim offset "otherwise overall good results."

In the press release, the Chairman/CEO J.M. Bernhard, Jr. also said, "Lastly, this quarter's record backlog of $8.1 billion was our fourth consecutive record and reflects the strong market conditions we are experiencing across all our business lines, especially the energy and chemicals markets. We expect our revenues to continue to be strong as revenues from these new major projects begin to be reflected in our operations. We have begun field work on several of these new major projects including two coal-fired power plants, several large FGD scrubber projects and several chemicals projects in the Middle East."

Shaw is a leading global provider of technology, engineering, procurement, construction, maintenance, fabrication, manufacturing, consulting, remediation, and facilities management services for government and private sector clients in the energy, chemical, environmental, infrastructure and emergency response markets. This company according to industry contacts is also one of the few companies that can accommodate almost all aspects of the power and energy infrastructure from start to finish, and has ongoing contracts for years.

This $8.1 Billion backlog should make for a steady business that is now valued with more fair valuation multiples than it has been in the past. The surprises from quarter to quarter can be a gift that keeps on giving, or can be the gift that demands more and more maintenance. Along with the revenue restatement, that appears to be what has happened here. This company has had its share of legal issues in the past, and the company has an extensive "risks and disclosures" statement. Fortunately for them they are in what many would consider a sweet spot out of a handful of companies ripe for consolidation.

The market cap had been over $2 billion Friday, which is now under $1.8 billion. It carries a fairly high P/E ratio (30+) because of its irregular income postings. The company already employs 22,000 employees and acquired the old Stone & Webster, so it is unclear if you would want to think of them as a shark or as bait.

You can likely find just as many market pundits on a long-term basis that would describe this company as a "glass half-empty" or "glass half-full" scenario, but with the shares now down 40% from the 52-week highs we'll take a longer-term "glass half full" stance as the company is just too entrenched across too many infrastructure sectors to ignore.

Keep in mind that after you see large drops in stocks, they are often followed by addtional drops. This is a longer-term watch here that isn't so dependent on today's price as an absolute bottom and is worthy of much more work. The long-term value here seems intact and these situations create opportunities for long-term investors seeking value or bargains to step in.

Jon C. Ogg
July 10, 2006
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