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Fluor & Foster Wheeler: A Study In Contrasts

Wednesday, 9 Nov 2011 | 7:45 PM ET

On a rough day on Wall Street that was full of confusion and chaos, “Mad Money” host Jim Cramer urged investors to find the truth about companies on their own.

Cramer: It's FLR vs. FWLT
Mad Money's Cramer says investing in companies in the same industry doesn't necessarily mean you'll get similar results. For example, in the engineering & construction sector, Fluor is in terrific shape, and is a buy; while Foster Wheeler is doing awful, and investors should stay away from it.

"The headlines are often misleading, and a lot of the media coverage out there is either uninformed or just plain wrong," he said. "I'm not criticizing the press here, but you need to recognize that reporters think like reporters, they don't think like money managers, yet that's exactly what you need to do if you want to be a good stock picker and a good and smart investor."

Consider Fluor and Foster Wheeler, two engineering and construction plays that reported earnings last week.

Fluor and Foster Wheeler build and service things such as power plants, refineries and wind farms, along with various mining, industrial and infrastructure projects. Commodity prices remain high, which means many of Fluor and Foster Wheeler's customers have a lot of money to spend on new projects.

Yet when Fluor and Foster Wheeler reported last week, both stocks were pummeled. Fluor fell 6.3 percent the following day, while Foster-Wheeler took a 6.5 percent hit.

What Should Concern Investors
In reality, though, when you know what you should be looking for, it's clear that only one of these quarters was lousy. The other was actually pretty darned good, Cramer said.

While it's true that both Fluor and Foster Wheeler missed Wall Street's consensus earnings estimates, there is a whole lot more to how a company's doing than that simple headline number.

Cramer reiterated that savvy investors do the homework, which means combing through the whole earnings release and then actually listen to the conference call or at least read the transcript.

Specifically, what matters are the key metrics that matter to a particular industry — an important concept that we're taking out of the "Mad Money" tool box tonight to help explain the difference between Fluor and Foster Wheeler.

In a given quarter, some line items that are far more important than the headline earnings and revenue numbers you see in the paper. For the engineering and construction industry, the key metrics are the backlog — the amount of business a company has in its pipeline — and orders, the new business a company brought in during the quarter.

Fluor leads the engineering and construction industry, with a diversified mix of businesses, a giant global footprint, the strongest balance sheet in the space, and the biggest backlog.

When Fluor reported last Thursday, they delivered a 7-cent earnings miss off an 85-cent basis and gave conservative guidance for next year, which is why the stock got slammed. That entire miss was because of a charge Fluor took on a wind farm project that's been very costly to the company with lots of difficult weather and logistical issues. But that wind farm is 90 percent complete, and without the charge Fluor would have easily beaten the numbers.

That shouldn't be a problem going forward, Cramer said.

Looking to 2012
How about the supposedly downbeat guidance for next year?

First of all, Fluor likes to be conservative. But frankly, if you want to get a read on how this company will do in the future, then it makes a lot more sense to look at the backlog and the orders — the key metrics — because they actually determine how much money Fluor will make going forward.

And guess what, Fluor blew away expectations for both of these key metrics.

The company had a record backlog of $42 billion, up 27 percent from last year and up 4 percent from the prior quarter. That's super impressive since most companies in the engineering and construction space saw their backlogs decline from last quarter. As for orders, Fluor had $6.7 billion in new contract awards-way better than even the high end of the expectations, which was for merely $5.6 billion, mainly thanks to strong oil, gas, industrial and infrastructure wins. The company has a book to bill ratio of 1.1, which means it has more orders than it can fill. Plus, as Fluor ramps up its oil and gas business, its margins have a lot of upside since these are higher priced contracts, and there's a lot of room to run here as oil and gas projects are still 34 percent off their highs from the 2008 peak.

In other words, when you look at the metrics that matter, Fluor delivered an awesome quarter.

What about Foster Wheeler?

This is a smaller company specializing in oil and gas as well as power projects, and it has serious management credibility issues. When Foster-Wheeler reported on Tuesday of last week, they blew it. This is one case where the negative headlines were not misleading — except that perhaps they weren't negative enough.

Foster-Wheeler missed on earnings — a huge 11-cent miss off a 44-cent basis — it missed on revenues, it missed on margins. And while all of that was really bad, this stuff pales in comparison to the company's lousy backlog and weak orders. The backlog fell 18 percent year over year and 14.5 percent from the previous quarter — terrible considering that the analysts were only looking for a 5 percent decline.

Meanwhile, the company's orders were awful — down 18.6 percent in its power division, and down 11 percent in its engineering and construction division. Foster Wheeler had a consolidated book to bill ratio of 0.58, which means they have far fewer orders than they could potentially handle. They're not winning enough new business and the competition is eating them alive.

The bottom line: When you're investing, don't paint with too broad a brush. Companies in the same industry don't necessarily have similar results, even when the media says otherwise.

At publication time, Cramer's charitable trust owned stock in Fluor.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com

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