Technical Services Companies to Watch in 2013

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Engineering and Construction (E&C) market, which has been running at a slow pace in recent years, is showing recovery signs. Selected sector opportunities have emerged as a significant growth factor for E&C companies over the near term, in the form of new bookings with revenue growth to follow. Lower spending in the past has created a potential investment deficit that now opens new roads of long term growth for industrial and technological improvement, infrastructure development associated with global urbanization, and energy sources. The new projects include utilizing abundant natural gas resources in the United States including its production, transportation and consumption. The stocks of E&C firms should see a wide upside potential with the new $105 billion transportation bill which will fill the gap in the industry with new projects creating a healthy contract backlog.

I have taken 3 stocks KBR Inc., Aecom Technology Corp and URS Corp into consideration that have performed well with significant appreciation in the last six months. The companies are still attractive to make an entry well backed by their strengths in revenue generation capabilities.

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Source: Yahoo Finance

KBR (NYSE: KBR) is winning new contracts to drive its portfolio and proceeds. Latest in the winning spree for December 2012, KBR has five major projects which include -
1. Cameco Corporation's contract: to execute boiler demolition and construction for its Rabbit Lake boiler project.
2. Indorama Eleme Fertilizer & Chemicals Ltd.: Contract to provide ammonia technology for its planned grassroots ammonia plant in Port Harcourt, Nigeria.
3. Kentucky Utilities contract to provide EPC services for the installation of air emissions control systems at its Ghent Generating Stations in Ghent, KY.
4. Mansuriya Full Field Development contract to FEED studies and QCSS for the Turkish Petroleum Overseas Company.
5. Another contract to execute project management and field construction for an Air Combustion Upgrade Project in Georgia.

These contract winnings attest the company's service quality which it provided in earlier deliveries. Also these would not only contribute to revenue but will also increase the company’s scale and scope for the future developments.

In a recent release it came to light that URS (NYSE: URS) has lost the Southwest Corridor light-rail contract to its competitors. The Metropolitan Council has now awarded the $94 million engineering contract to Aecom Technology and Kimley-Horn. URS Corp has failed to win due to the flaws in construction of Martin Olav Sabo Bridge in Minneapolis. The construction work on the bridge closed early 2012 when two of its cables broke down. This loss would weigh heavy on its quality of services and will affect winning future contracts. However, URS Corp has diversified plans to grow from its sales. In May 2012, URS acquired Calgary, Alberta based oil and gas producer Flint Energy Services in a deal valued at $1.24 billion. Flint generates 80% of its revenue from Western Canada's energy regions and 20% from the United States. This acquisition is a strategic move by URS to enhance its position in North America's oil and natural gas industry. In the last 12 months, natural gas has emerged as a significant energy resource coupled with its huge availability and environmental soundness as compared with other energy sources. Also its multiple applications across all sectors and means will play an important role in increasing its demand year over year which is evident in the rush for natural gas deals.

My favorite of the three, AECOM Technology (NYSE: ACM) seems to be acting aggressively on a shareholder friendly strategy. Aecom is now left with $140 million of its $300 million repurchase authorization program announced in August 2012. Following this, the company is on track to retire 20% of shares since the repurchase inception. It expects to return over 90% of free cash flow to its shareholders in FY13.
At the analyst event held on December 4, 2012 at New York City, AECOM has detailed down its focus on cash generation and profit margin improvement and to limit down its focus from inorganic growth avenues via niche acquisitions. The company management has stated their confidence in generating $1 billion of cash in the next five years.

Below mentioned are few reasons; I give more weight to this stock:

Acquisition of KPK:
Aecom has recently acquired KPK which will join its operations with its Asian arm Davis Langdon. KPK serves a vast clientele base in both public and private sectors with operations across Asia. Its proven track record has been gained in its working on large scale projects from all over Asia. This acquisition will add expertise to Aecom’s portfolio and expand its presence in the emerging markets of Asia which will bring in new opportunities. Aecom's growth in its Asia Pacific business has slowed down in recent years from +20% to +10% year over year. I believe that this deal will bolster its reach and help its growth figures to surpass previous highs. The combined capabilities will be delivered across the global platform which will result in meaningful top line growth for the company.

Free Cash Flow Generation: As briefed out above, the company’s management is laying their plans on cash generation operations as their top priority. The Company is aiming to bring at least $1 billion of FCF in the next five years crossing the past years cash creation of $759 million. The trailing five year average FCF yield for Aecom stands at 6%, with current FTM yield of 11% and forward five year average of ~8% which is favorable when compared with average E&C FCF yield currently of 2.6%.

Revenue generation stream: Aecom has new contract awards worth $2.23 billion driven by both PTS ($1.99 billion) and MSS ($243 million). Total contract backlog now stands at $8.50 billion which was $8.35 billion at the end of FY3Q12. A good sign of future contracted backlog i.e. total awarded backlog increased to $7.52 billion from FY3Q's $7.48 billion. Moreover, the commercial market prospects for Aecom seems to be easing particularly in the Northeast U.S., where as in New York City the construction spending is forecasted to exceed $30 billion this year, the highest in the past four years.

Summing it up, I think that Aecom's focus on margin improvements and on building its presence in emerging markets will be the key drivers for its revenue base. Aecom will leverage the KPK's deal to expand its construction services to further capitalize on infrastructure-related opportunities. In the international segment, Asia is the solid growth driver with its new wins increasing over 40%.

ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own

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