RESEARCH REPORT – BWC: AN OPPORTUNITY BY WAY OF INOPPORTUNE DISASTER
*Position taken on August 22nd in the mid-25 range.
*Position exited on September 21st at an average price of 26.10
BWC - The Babcock & Wilcox Co. represents my favorite type of opportunity in that the share price has been victimized by inopportune events. As such, I took a small position in this mid-cap company in the mid-25 range during today's trading session.
Let me explain what I mean by inopportune events: First, the company is a spin-off from MDR (McDermott). Spin-offs aren't given much room for error as they are greeted in either one of two ways:
1. By current investors in the parent company who receive shares of the spin-off immediately selling the newly issued shares creating months of selling pressure
OR
2. By current investors in the parent company taking a wait and see approach. This is typically followed by flinching at the first sign of bad news.
Either way, spin-offs are typically ignored by a majority of retail and institutional investors while selling pressure remains consistent for the first part of their existence. A good recent example of this would be AOL, which saw nearly two years of negativity before turning around and becoming one of the best performing tech companies of 2012.
BWC was fortunate in the fact that it was spun off from MDR right before QE2 was announced and it responded well. It hardly suffered, beginning a steady regimen of upward movement from a low of 21 in October of 2010 to a high of 36 in March of 2011.
The inopportune event came with the arrival of the Japanese tsunami and the destruction of the Fukushima nuclear power plant. Now is a good time to tell you what BWC does:
The Babcock & Wilcox Company provides clean energy technology and services for the nuclear, fossil, and renewable power markets worldwide.
Nuclear or Nukular depending on the color of your state. BWC is, in fact, one of the largest manufacturers of nuclear power plants in the world. If you will remember following the Fukushima disaster, the nuclear energy sector was forecast to be eliminated over the next decade, as countries could no longer tolerate the risk of having such a potential environmental and humanitarian disaster on their hands. This is typical panic following any disaster in that wide-reaching negative assumptions are made regarding the future of those who are to blame. The elimination of entire industries is always greatly exaggerated.
BWC proceeded to fall from a high of roughly 36 when the Japanese tsunami hit to a low of 18 in mid-September of 2011. The inopportune natural disaster paired with market dislocation caused the company to give back 50%. At current prices, it is still very close to its spin-off price, this is despite continuing innovation and earnings growth.
The following chart represents the earnings growth of the company paired with a shrinking P/E ratio. Obviously as a result of being affiliated with a sector that has a black cloud hovering over it, although that cloud is dissipating by the day.
The environmental segment also leads growth in bookings:
Environmental bookings during the second quarter were $176.8 million, an increase of 72.3% compared to the second quarter of 2011 continuing a positive year-over-year trend in the environmental equipment and systems market that started in mid 2011.
Executives at BWC have also said that they will announce plans to return capital to shareholders either via a dividend program or share repurchase before the end of 2012.
Bottom line: We have a company that was very much on the right track before a natural disaster turned its industry inside out. Panic regarding the future of their core industry created a 50% haircut in the per share price. The fact that the company was a recent spin-off didn't help its case. That panic is the opportunity. They are growing revenues and earnings in an energy sector that is very much in demand. A 13 P/E for a 100 year old plus company that is a leader in its field and in a niche that has a barrier to entry guarded by fire breathing, three headed dolphins is simply too good to pass up. Especially as crude oil is on a path above $100 once again.
Now let's take a look at the price structure:
click chart to enlarge
BWC
