Babcock & Wilcox Downgraded to Hold - Analyst Blog

By Zacks Equity Research,

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On Aug 23, Zacks Investment Research downgraded the engineering firm, Babcock & Wilcox Company ( BWC ), to Zacks Rank #3 (Hold).

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) program.

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 repurchase programs.

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. ( RRC ), Matador Resources Company ( MTDR ) and Clayton Williams Energy, Inc. ( CWEI ). These stocks sport a Zacks Rank #1 (Strong Buy) and offer tremendous value.

BABCOCK&WILCOX (BWC): Free Stock Analysis Report

WILLIAMS(C)ENGY (CWEI): Free Stock Analysis Report

MATADOR RESOURC (MTDR): Free Stock Analysis Report

RANGE RESOURCES (RRC): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: BWC , C , CWEI , GCI , MTDR

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