Foster Wheeler: Another Hedge Fund Victim

Infrastructure giant Foster Wheeler in 2006 reported record earnings. The next year the company doubled that. Now, two quarters into 2008, earnings are up another 35%. But still, the stock has been cut in half.

Apparently, Wall Street’s afraid that falling energy prices have either prompted project cancellations or are holding back new business. That’s why Foster Wheeler CEO Ray Milchovich today announced a $750 million buyback, an amount equal to about one-eighth of the company’s total capitalization right now. As a result, the stock rose $4.02 in Friday trading, or 10.5%.

Milchovich called the move “prudent” given that FWLT, despite having virtually no corporate debt and $1.3 billion cash at the end of the second quarter (this is company with a $6 billion market cap), is being treated like it was a financial stock. At one point this week, FLWT was trading at just 6.5 times earnings.

That’s beyond cheap for a firm that’s experiencing no project delays or cancellations despite falling energy prices. Foster Wheeler builds infrastructure for energy, chemicals, pharmaceuticals and power companies, and the CEO said that business is going strong. If anything, Milchovich said, the only issue is the Foster Wheeler doesn’t have all the capacity it needs to meet the market demand.

Besides, Foster Wheeler’s business is most successful in parts of the world where energy is most abundant. The company does well in Australia, parts of Asia and the Middle East. And these countries have pre-sold the energy they’re producing, Milchovich said, “so it’s impractical for these projects to be cancelled.”

Still, there are doubters who believe that, while Foster Wheeler isn’t experiencing cancellations, the declining energy prices are preventing the company from booking new projects. But Milchovich denied this was the case, saying that business orders start at a proposal stage. So there are a few months between first offer and contract. And the CEO has seen no “material change” whatsoever in either the proposals or the eventual orders.

“Our long-term outlook is very, very, very robust,” Milchovich said. “And if it weren’t, we wouldn’t have announced the buyback program this morning.”

Foster Wheeler is just one of the many commodity-related stocks that Cramer has said is being hurt by hedge funds. Funds desperate to raise cash for client redemptions are dumping millions of shares at a time into the open market, bringing down FWLT even further. But this new buyback now gives these hedge funds “a place to go,” Cramer said, saving the stock from more damage.

Cramer thinks Foster Wheeler goes higher.

Jim's charitable trust owns Foster Wheeler.

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