On Aug 23, Zacks Investment Research downgraded the
Babcock & Wilcox Company
), to Zacks Rank #3 (Hold).
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Why the Downgrade?
Babcock & Wilcox is engaged in providing clean energy
technology and services for the nuclear, fossil and renewable
power markets worldwide. The company operates in four business
units: Power Generation, Nuclear Operations, Technical Services
and Nuclear Energy.
On Aug 7, the Charlotte, N.C.-based firm reported its second
quarter 2013 results. Though earnings of 72 cents beat the Zacks
Consensus Estimate, operating income recorded a drop of $11.4
million y-o-y to $98.7 million. This was due to weak performance
by its Power Generation, Nuclear Energy and Technical Services
segments. Operating income also bore the brunt of a $12.2 million
investment on the company's Global Competitive Initiative (GCI)
The cost of operations reflected an increase of 10.7%
year-over-year. Despite receiving substantial awards in its power
generation business, Babcock & Wilcox reiterated its lower
growth expectations due to cheap natural gas prices and
uncertainty regarding the Cross-State Air Pollution Rule. The
nuclear energy segment also expects slow growth due to its
dependence on the Canadian nuclear market, which does not hold
promise in the near future.
Also, Babcock & Wilcox's heavy dependence (approximately
one-third of its revenue) on the U.S. Government causes concern
as cuts in Government spending can have a significant negative
impact on the company.
However, we cannot overlook the positive aspects of the company.
Babcock & Wilcox reported a 3.9% y-o-y increase in revenues
in the second quarter. Moreover, despite a drop in backlog, the
upcoming quarters appear promising with new project wins.
Also, the company efficiently uses its free cash flow to provide
quarterly cash dividends and enhance value through share
Stocks That Warrant a Look
While we expect Babcock & Wilcox to perform in line with its
peers and industry levels in the coming months and advice
investors to wait for a better entry point before accumulating
shares, one can look at energy sector companies such as
Range Resources Corp.
Matador Resources Company
Clayton Williams Energy, Inc.
). These stocks sport a Zacks Rank #1 (Strong Buy) and offer