Tuesday, November 20, 2007

Engineering & Construction

One space that has interested me is the engineering and construction (E&C) industry. There are several major players in the E&C industry (KBR, FWLT, SGR, FLR, JEC, NRG, & MDR). On pure valuation basis, McDermott (MDR) looks like the most attractive company to own. McDermott has an $8B backlog of orders for the construction of power plants, deep water drilling rigs, and nuclear projects with the U.S. government.

McDermott is in the sweet spot of the E&C industry. Offshore oil rigs command higher day rates for drillers and are extremely profitable for McDermott to build. McDermott's experience will be crucial in winning future construction contracts.

The growing global demand for electricity has mostly been driven by population growth. Another contributing factor has been technological innovation. There are now more computers, TV's, cell phones, servers, and mp3 players that demand power. The power infrastructure has been one of the most neglected industries in the world due to tight regulation of electricity rates. As rate freezes end and CO2 regulation could begin, McDermott will be busy retrofitting existing coal power plants with scrubbers and upgrades. McDermott has the expertise in nuclear, coal, and oil to handle the infrastructure upgrade cycle. Over the next three years McDermott will be the E&C stock to own.

Note: I am long MDR

Wednesday, November 07, 2007

Credit Situation Worsening

I felt that most of the credit crisis was behind us after the first interest rate cut in September. Today's market reaction paints a darker picture about the credit crisis. It's important to remember that residential mortgage rates are tied to the 10-year yield, not the Fed Funds rate. Cutting interest rates further would help the mortgage crisis, but won't solve it.

Technology, agriculture, and energy look attractive at current levels. Some long term value could be found in retail. Coach (COH) is starting to look attractive. The problem is that the institutions are avoiding retail like the plague. Calling a bottom in retail is tough with higher gas prices looming. Mosaic (MOS) is still my favorite agriculture stock to own.

Note: I have no position in COH. I am long MOS