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“Subprime” NOT the headline from Honeywell’s quarter – Part 2: Strength in Energy, Construction, and Infrastructure

Moving on in Honeywell’s call, management was also excited about the Specialty Materials business:

“Let’s go now to slide number 8, Specialty Materials. Sales are up 6% for SM; segment profit increased 43% driving 340 basis point improvement segment margins to 13%. UOP had a great quarter; sales grew 28% compared to last year and UOP continues to experience strong demand for its proprietary technologies refining and petrochemical market conditions remain favorable, and we continue to leverage a strong market positions and global presence in UOP. Chlorine [ph] products were down 15% in revenues in the quarter due to softness in refrigerants, which is impart of course due to continued weak demands in the U.S. housing market, strong advanced fiber sales within specialty products were offset by declines at resins and chemicals due to a plant maintenance outage, so those two are essentially offset; specialty products and resins and chemicals.”

Ok, there were some weakness related to the weak U.S. housing market. But I am loving the strong demand for refining and petrochemical technologies reaffirms the lack of refiners and oil processing facilities world wide.

“This is still a real shortage of overall refining capacity out there. And there is a lot of refineries on the drawing board all of which are going to be good for UOP. So I feel pretty good about the prospects of this business for a while.” ~David M. Cote, Chairman and CEO

This means The Shaw Group (SGR)’s outstanding quarter was not an anomaly, and other engineering and construction firms such as Foster Wheeler (FWLT), Fluor Corp. (FLR), and Jacobs Engineering (JEC) can all still be bought. Even though The Shaw Group has a decent mix of businesses, I believe its not as well diversified with 46% of its backlog in Fossil and Nuclear plants and 77% domestic business. Following my thesis that the strong economies of the world (NOT the U.S.) and those making bank on this run in commodities (South America, Australia, Mid-East) will be the best customers for Engineering and Construction firms, Foster Wheeler and Fluor Corp are my two favorites. These foreign countries are growing the fastest and NEED the infrastructure, and likewise their big stockpiles of money means they’ll pay construction companies just about anything to complete the projects. This is a nice tailwind domestic companies just don’t have. Same reason why Halliburton was forced to move its headquarters to Dubai. Both Foster Wheeler and Fluor corp are very well diversified geographically and have the most business in the strongest sectors. This is important for Engineering and Construction companies since the time for project completion varies, sometimes due to the complexity of the projects and sometimes due to unforeseen complications. Thus, revenues realized from completed projects are lumpy quarter to quarter but diversification may make for a smoother ride when no one project can cannibalize earnings.

Opportunity International gratefully accepts gifts of securities, both publicly-traded and closely-held.

Here’s the breakdown of Foster Wheeler and Fluor’s portfolio for year ’06, choose your favorite:

Foster Wheeler
Geographic: North America (25.1%), South America (3.5%), Europe (28.5%), Asia (11.8%), Mid East (13.5%), Other (17.7%).
Businesses: Power generation (38%), oil refining (20%), pharmaceutical (3.7%), oil and gas (19%), chemical/petrochemical (11%), power plant operation and maintenance (3%), environmental (2%), other and eliminations (2.3%).

Fluor Corp
Geographic: United States (35%), Canada (6%), South America (11%), Europe (17%), Asia Pacific (3%), Autralia (5%), Mid East (21%), Africa (2%)
Businesses: Oil and gas (40%), industrial and infrastructure (24%), government (21%), global services (12%), power (3%).

Foster wheeler’s the one stop shop for all engineering services. However, since I already have a significant position in ABB for power generation, I would be looking to Fluor corp as a better fit for my portfolio so I’m not too overweight in power generation and have more oil and gas.

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Here’s a great article by Ryan Krueger of Minyanville.com: “Follow the Money. In this case, follow the petrodollars.”

** Disclosure: author has positions in HON and ABB.**

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