Description

Washington Group International (WGII; $57; $1.7 billion)

 

 

Summary

 

Washington Group International was an interesting idea presented at the Value Investing Congress in NYC.  The Company has been written up multiple times on VIC and these represent good background.  We think the investment opportunity is attractive right now for several reasons which are summarized below:

 

1)      Non capital intensive service business which generates excellent free cash flows and earns attractive returns on invested capital;

2)      More than 90% of new work comes from repeat clients – these relationships help create some competitive barriers and there are a limited number of companies that can provide these services;

3)      Attractive valuation – we think there is $16 per share of value in excess cash and NOL value which reduces net market valuation to $41 per share – as described below, we think the Company has earnings potential of $3.50 to $4.00 per share in 2008 – reasonable multiple of 10 to 12x 2008 earnings given that backlog is growing in mid teens and outlook for end markets is good over next few years;

4)      Backlog continues to grow steadily at over 15% p.a. as industry demand is very strong due to favorable end-market trends (energy demand, new nuclear, higher metals prices, environmental remediation) - backlogs for the industry are up strongly with demand exceeding supply;

5)      Losses from three fixed-price highway contracts with cost overruns have depressed earnings during 2004-6.  We think true earnings potential will become clearer in 2007-8 and believe the Company can earn $3.50 to $4.00 per share in 2008 once the highway contracts are behind it;

6)      Backlog has a lower risk profile that prior years as management has reduced exposure to riskier fixed price bid contracts over the past three years (down from 50% to 20% of backlog), instead focusing on lower risk cost plus contracts – we think losses such as those on the highway contracts are much less likely going forward;

7)      WGII trades at a discount to industry comps: 

a.       WGII (adjusted for cash and NOL) trades at 15.5x 06 EPS and 14x 07 EPS;

b.      FLR trades at 32x 06 EPS and 23x 07 EPS;

c.       JEC trades at 26x 06 EPS and 21x 07 EPS

d.      WGII estimates are based on Street estimates (we believe WGII is likely to exceed 07 EPS estimate) and include no provision for incremental earnings from any claims realizations (see below);

e.       WGII trades for 7.3x 2006 EBITDA (adjusted for cash and NOL) versus 15x for Jacobs Engineering (JEC) and 16x for Fluor (FLR); we also think 2006 EBITDA of $168 million may understate true earnings potential;

8)      Substantial claims related to highway contracts (about $130 million), which are not booked as income until substantially settled, could provide incremental income and cash flow in 2007-8 and are not included in management guidance;

9)      Recently spent $175 million repurchasing warrants/shares and Board just authorized another $100 million;

10)  $50 million to $100 million in working capital not reflecting normal business needs should provide incremental cash flow in 2007-8; and

11)  AMEC plc, a U.K. based competitor and third largest E&C company in world, was reportedly recently approached by TPG/First Reserve about going private at much higher multiples than the Company trades for (private equity could be noticing attractive characteristics of this industry).

 

Background

 

Washington Group International provides design, engineering, and construction services in six market segments, including power, infrastructure, mining, industrial, defense, and energy/environment.  WGII participates in joint ventures, often as a manager of a project, formed for the purpose of bidding, negotiating, and completing specific projects.  WGII participates in two mining ventures: MIBRAG (50% owned) which operates lignite coal mines and power plants in Germany and Westmoreland Resources (20% owned), a coal mining company in Montana.  WGII has about 24,000 engineering and construction professionals in its various business segments and has project sites and offices in more than 40 states and over 30 countries. 

 

WGII went through a bankruptcy in 2001 due it the acquisition of Raytheon Engineers from Raytheon.  The acquisition included problematic fixed-price contracts and cost overruns resulted.  WGII came out of bankruptcy in January 2002 both debt-free and with a large NOL.

 

A short summary of the Company’s segments is as follows:

 

Power (23% of 2006 revenue) – provides engineering, construction, and maintenance services in nuclear and fossil power markets for turnkey new power plant construction, plant expansion, retrofit and modification, decontamination and decommissioning, licensing and environmental permitting.

 

Power segment highlights include:

a)                  Has designed or installed more megawatts (over 200,000) than any other company;

b)                  Has completed 46% of completed U.S. FGD retrofits in last 10 years;

c)                  One of two entities doing major component replacements at U.S. nuclear power plants;

 

Infrastructure (17% of 2006 revenue) – provides engineering, construction, construction mgmt, and operations and maintenance for highways and bridges, airports and seaports, tunnels, railroad and transit lines, water treatment, and hydroelectric facilities.

Infrastructure segment highlights include:

a)                  Largest DBOM (design, build, operate, and maintain) project ever constructed in U.S.;

b)                  Largest private operator of highway tolls in U.S.;

c)                  Focus on large cost plus federal projects.

 

Industrial/Process (15% of 2006 revenue) – provides design, engineering, procurement, construction services, and total facilities management for general manufacturing, pharmaceutical, biotech, oil production, gas treating, food and consumer products, automotive, aerospace, and paper and pulp industries.

 

Industrial/Process segment highlights include:

a)                  Market leader in global integrated facility management;

b)                  Oil & gas work includes design, EPC, and maintenance;

c)                  Design/build contractor on world’s largest sulfur handling facility.

 

Defense (17% of 2006 revenue) – provides range of technical services to U.S. Dept of Defense (DOD) including operations and mgmt services, environmental and chemical demilitarization services, waste handling and storage and engineering, procurement, and construction services for armed forces.

 

Defense segment highlights include:

a)                  Has destroyed over 80% of U.S. chemical weapons stockpile;

b)                  Over 240 Russian ICMB disassembled for Defense Reduction Agency;

c)                  Two major contracts in Eastern Europe to detect movement of weapons of mass destruction across borders.

 

Energy & Environment (23% of 2006 revenue) – provides services to U.S. Dept of Energy (DOE) which maintains the nation’s nuclear weapons stockpile and performing environmental cleanup and remediation.  This segment also provides the U.S. government with construction, contract mgmt, supply chain mgmt, quality assurance, admin, and environmental cleanup and restoration services. 

 

Energy & Environment segment highlights include:

a)                  #1 market share in DOE’s environmental mgmt and closure market with over 30% market share;

b)                  The largest nuclear talent pool of any supplier to nuclear power industry with over 7,500 experienced workers.

 

Mining (5% of 2006 revenue) – provides contract mining, resource evaluation, mine planning, production scheduling, engineering, mine reclamation and operations management to coal, oil sands, industrial minerals, and metals markets.

 

Mining segment highlights include:

a)                  Has mined 18 to 20 million tons per year at its MIBRAG operation in Germany since 1994;

b)                  Mines and delivers about one third of Jamaica’s annual bauxite production.

 

 

In providing the above services, the Company will enter into four basic types of contracts:

 

a)                  Fixed price or lump sum contracts providing for a fixed price for all work to be performed;

b)                  Fixed unit price contracts providing for a fixed price for each unit of work performed;

c)                  Target price contracts providing for an agreed upon price where company absorbs all or part of cost escalations to extent of its fee and share in any cost savings; and

d)                 Cost-type contracts providing for reimbursement of cost plus a fee.

 

Engineering, construction management, maintenance and environmental and hazardous substance remediation are typically cost plus type contracts.  Design-build and construction contracts are often performed on a fixed price basis.

 

 

Growing, Diversified Backlog with Reduced Risk

 

The Company has consistently moved away from fixed price contracts and focused on cost reimbursable contracts while significantly growing its backlog over the past four years.  Cost reimbursable contracts do not expose the Company to losses if cost overruns occur on projects.  The increased portion of reimbursable contracts is important because our investment thesis assumes there will not be a repeat of the highway project losses on some other project that was mis-priced.

 

Ending Backlog ($’s in millions)
		2002	2003	2004	2005	2006
Year End Amount		$2,755	$3,323	$4,004	$4,880	$5,600
Growth			21%	21%	22%	15%
% Fixed Price		44%	42%	36%	29%	20%
% Cost Plus		56%	58%	64%	71%	80%
Contracts not in Backlog		$1,800	$1,300	$2,600	$3,600	$3,900
Combined Backlog		$4,555	$4,623	$6,604	$8,480	$9,600

 

We believe the reduced fixed price portion of backlog makes a repeat of the highway contract losses unlikely and also potentially justifies a higher multiple.  While backlog at year end 2006 still includes over $1 billion of fixed price contracts, our discussions with management indicate that about $700 million to $800 million of these contracts are fixed price mining contracts where the Company receives a fixed price per unit mined.  These contracts have a lot less risk of loss than the fixed price highway contracts.

 

There are a large amount of contracts not in backlog, including $3.2 billion of government contracts (which are beyond 2 years out) and $800 million of mining contracts (which are beyond 5 years out).  Growth in both the official backlog and combined backlog has been strong in recent years.  Backlog growth is generally a pretty good indicator for future revenue growth.

 

Backlog is growing as new work continues to exceed revenues each year and demand in the Company’s end-markets is strong.  Specifically,

 

a)                  Power segment is experiencing strong market conditions for plant modification and new-generation projects.  The rebirth of new nuclear should also help new work results;

b)                  Industrial/Process segment oil and gas and facilities management markets are strong;

c)                  Mining segment is benefiting from continued strong demand for coal, metals, and industrial minerals;

d)                 Energy & Environment segment expects several opportunities as DOE is scheduled to award contracts at environmental remediation, nuclear operations, and laboratory sites in 2007; and

e)                  Infrastructure segment is continuing to gain traction thru its low-risk business model

 

Strong backlog has set stage for double digit revenue growth in 2007 with growth in Power and Industrial/Process segments expected to be especially strong.

 

 

Backlog
			12/31/03	12/31/04	12/31/05	12/31/06
Power			$497	$716	$925	$1,262
Infrastructure			$1,054	$1,121	$1,046	$800
Mining			$435	$516	$565	$733
Industrial/Process			$254	$294	$488	$1,228
Defense			$642	$870	$990	$954
Energy & Environment			$441	$487	$866	$629
Total			$3,323	$4,004	$4,880	$5,605
% Change				20%	22%	15%
New Work
			12/31/03	12/31/04	12/31/05	12/31/06
Power			$497	$854	$1,004	$1,129
Infrastructure			$1,054	$960	$594	$400
Mining			$435	$216	$312	$365
Industrial/Process			$254	$435	$620	$1,252
Defense			$642	$723	$677	$539
Energy & Environment			$441	$442	$988	$540
Total			$3,323	$3,630	$4,195	$4,225
% Change				9%	16%	1%

 

 

Financial Summary:

 

 

Income statements
FYE 12/31		2003	2004	2005	2006
Sales		$2,501	$2,915	$3,188	$3,398
EBITDA *		$155	$134	$120	$168
EBITDA %		7.3%	4.3%	3.9%	4.9%
EBIT *		$151	$112	$92	$116
EBIT %		6.0%	4.0%	3.1%	3.4%
Minority Interest expense**		$22	$15	$5	$3
Net income		$42	$48	$54	$81
Yr End Backlog		$3,300	$4,000	$4,900	$5,600
Backlog Cost Plus %		58%	64%	71%	80%
New Work		$3,200	$3,600	$4,200	$4,225
Equity in income of unconsol. Affiliates *		$26	$27	$30	$36
FYE 12/31		2003	2004	2005	2006
Net income		$42	$51	$58	$81
Dep & amort		$31	$22	$28	$52
Non cash adjust		$49	$47	$9	$15
Working capital changes		($43)	($7)	$10	($62)
Cash from operations		$79	$113	$105	$78
Capital expenditures		($12)	($35)	($63)	($64)
Dividends		$0	$0	$0	$0
Share / warrant repurchase		$1	$0	($73)	($102)
Equipment disposals		$35	$21	$13	$9
Other					$88
Balance sheets
FYE 12/31		2003	2004	2005	2006
Cash		$239	$286	$238	$297
Total assets		$1,411	$1,588	$1,649	$1,732
Total debt		$0	$0	$0	$0
Shareholder equity		$661	$780	$747	$798
Shares outstanding		25.3	27.4	30.3	30.3

 

*Equity in income of unconsolidated affiliates is included in EBITDA, EBIT, and net income above.  The most significant components are the MIBRAG (50%) and Westmoreland Resources (20%) mining joint ventures.  The Company provides consulting services to MIBRAG and contract mining to Westmoreland.

** Minority Interest outstanding was effectively acquired by the Company on 12/31/05 for $37 million in cash.

 

Segment Results / Geographic Results:

 

 

Segment Results
			2003	2004	2005	2006
Revenue
Power			$512	$634	$766	$791
Infrastructure			$586	$891	$665	$578
Mining			$84	$110	$171	$167
Industrial / Process			$430	$395	$425	$511
Defense			$506	$495	$556	$576
Energy & Environment			$386	$397	$603	$774
Inter-segment, eliminations, etc.			($3)	($6)	$3	$1
Total			$2,501	$2,916	$3,189	$3,398
Operating Income
Power			$39	$35	$78	$46
Infrastructure			$32	($16)	($80)	($20)
Mining			$34	$33	$28	$18
Industrial / Process			$3	$18	$3	$8
Defense			$50	$40	$60	$50
Energy & Environment			$70	$73	$67	$94
Sub-total			$228	$183	$161	$196
Inter-segment and other unallocated
operating costs			($19)	($5)	$0	($5)
General and administrative			($58)	($60)	($64)	($76)
Total EBIT			$151	$118	$92	$116
Notes:
Infrastructure - Highway project charges			$0	($44)	($100)	($42)
Total EBIT (excluding Highway project chgs)			$151	$162	$192	$158

 

 

The segment results above show how significantly Infrastructure’s highway project charges on fixed price contracts have depressed overall results.  Management believes its Infrastructure business unit should be able to achieve a high single digit margin or better once the highway projects are behind it.

 

We think the Company’s operating income excluding the highway charges could be a good indicator of earnings potential once the highway projects are completed, probably in 2^nd half of 2007 or early 2008.  This assumes Infrastructure can start to contribute to segment operating profits.  Total EBIT excluding the highway project charges averaged for 2003 to 2006 is $166 million.

 

We believe EBIT excluding the highway charges from 2003 to 2006 is a reasonable way to estimate the Company’s future earnings potential.  The Company’s segment results can vary widely from year to year so an average over an extended period makes sense.  In addition, the Company’s backlog has grown significantly over these years, which should increase normalized earnings from these levels.

 

We think that by 2008 the Company will have put the problematic highway contracts behind it and that it can achieve total EBIT of $175 to $200 million by 2008.  Based on a 40% tax rate and about 30 million diluted shares, this would translate into roughly $3.50 to $4.00 per share of diluted EPS.

 

There is also a sizable amount of income from Middle East projects.  This income is expected to decline in 2007 and beyond and will certainly be a headwind.  Operating income from Iraq was $44 million in 2006 compared to $51 million in 2005 and management stated on the year end conference call that they expect this decline by at least 50% in 2007.

 

Revenue			2003	2004	2005	2006
U.S.			$2,260	$2,145	$2,499	$2,668
Iraq			$39	$492	$381	$332
Other International			$202	$278	$309	$398
Total			$2,501	$2,915	$3,189	$3,398

 

 

Fixed Price Highway Projects

 

The Company’s segments have all been profitable in recent years, with the exception of Infrastructure, as it has struggled with three difficult fixed-price highway projects and incurred substantial charges in 2004, 2005, and 2006.  These highway projects were “won” under a so-called “rip and read” bidding process where several bids are submitted and the low bidder wins.  The Company has understandably ceased bidding on these types of fixed price contracts and has not bid on one for over three years.  Management says these highway contracts are the only remaining “rip and read” contracts in backlog.

 

These highway contracts have had a large impact on earnings and cash flow over the past three years.  During 2004, 2005, and 2006, respectively, highway contract charges of $44 million, $100 million, and $42 million have been recognized.  During 2005, losses on the three highway projects required $55 million of cash and during 2006 an additional $80 million was funded, with $50 million expected for 2007.  The fixed-price highway contract charges have offset strong improvements in other segments in recent years. 

 

The project that has generated most of the losses is a $387 million fixed price highway project that is a joint venture (50/50) project the Company undertook with Fluor (FLR) to build a 10 mile privately-funded toll road section of the public-private State Route 125 South Expressway project near San Diego, California and a 3.5 mile public-funded segment of State Route 215.  The project is jointly owned by a unit associated with Macquarie, a large Australian building company with a particular focus on toll roads, and  Cal-Trans (the California state transportation authority).  There are also several local government entities in that area that are involved. 

 

According to the Company, numerous owner-directed changes have been made since the contractors made their initial fixed price bid.  Unless there is a material breach, under these types of contracts, the contractors are required to finish the project, funding the additional costs even if change orders cannot be agreed upon with the owners.  When a cost cannot be agreed upon after being submitted to the owners, it becomes a “claim” which the contractors have against the owners.  The claims are usually settled through mediation, binding or non binding arbitration, or litigation.

 

Management says the San Diego highway project is 75% completed at this point and is expected to be finished during 2007.  Another of the three highway projects in Nevada is basically complete.  And the final highway project, which has incurred smaller losses, is about 60% complete with a finish date in early 2008.

 

Only a small portion of cost increases on these highway projects have been agreed to with the owners.  The Company’s share of pending change orders and claims submitted are $97 million and additional amounts are in process.  The Company has recognized nothing on these claims and pending change orders.

 

When the Company is able to put these highway contracts behind it there should be multiple benefits:

 

a)                  Infrastructure segment results should swing from losses due to contract charges to profitability with the lower-risk approach to new work in Infrastructure over the past three years;

b)                  Earnings in 2007-8 could benefit from potential realizations on the large amount of claims or charge orders that have piled up on the highway projects (there is no provision for any realizations on these claims in management earnings guidance and any realizations would drop significantly to gross profit); and

c)                  Significant incremental cash flow in could be realized in 2007-8 (in addition to normal cash flow from operations) from some recovery on these claims (the Company has invested almost $130 million in cash in highway contract losses and management appears very focused on recouping as much of this capital as possible).

 

Management has accounted for cost overruns on its highway projects very conservatively.  It basically takes a loss for the entire amount estimated at that point in time and assumes no gross margin on the remainder of project.  The Company assumes no realization on the claims which it has generated on these highway projects until these claims are settled with the customer.  The Company would then take these claims realizations into earnings at a 100% gross margin.

 

The Company has historically achieved realizations on claims of 30-80 cents on the dollar.  The current highway claims are very large relative to previous experience.  There is a good chance these claims will be litigated with the project owners and not be settled until the highway projects are completed, probably in 2008.

 

The table shows the Company has consistently had claims revenue realizations from 2003 to 2005 but no claims revenue realizations for 2006.  We believe there could be significant claims realizations in 2007 and 2008.

 

				2003	2004	2005	2006
Revenue from claims				$35	$30	$23	$0
Less addl contract costs and sub
contractors share of settlements				($2)	($2)	($9)
Net impact on gross profit from claims				$33	$28	$14	$0

 

We do not pretend to know the timing or magnitude of the benefits to the Company in 2007-8 from the above items.  We also cannot guarantee there will not be some additional charges as the highway projects are finalized.  However, we do not believe the Company’s current valuation properly reflects the potential upside from the current situation.

 

2006 Results and Earnings Guidance

 

Management recently reported 2006 results and raised new work, backlog, and revenue guidance for 2006.  Backlog was $5.6 billion – the highest in five years.  80% of backlog was cost reimbursable business.

 

Revenue’s for 2006 were $3.4 billion, up 7% from 2005 revenue billion.  Revenue guidance for 2007 was raised from $3.6 to $4.0 billion to $3.7 to $4.1 billion, up $100 million, and an increase of about 12% (at mid-point) versus 2006.

 

The Company achieved net income of $81 million or $2.64 per diluted share for 2006.  Net income guidance for 2007 was left at $80 to $90 million or $2.60 to $2.92 but management indicated the higher end of the range was the most likely outcome.

 

New Work and Backlog Guidance

 

Management again raised the new work and backlog guidance in its 2006 year end press release.  Due to strength in its Power and Infrastructure/Process business units, WGII raised its guidance for new work for 2007 by $600 million from $4.2 to $4.6 billion to $4.8 to $5.2 billion.  Most of this new work is long-term and cost-reimbursable.  Management has indicated that demand for their engineering and construction services is exceeding supply and they appear to be using this dynamic to improve the quality of their backlog.  Management has repeatedly said they are being very selective about new work. 

 

Major contributors to the strong new work and backlog outlooks are as follows:

 

a)                  Power business unit continues to experience strong market conditions for clean-air plant modifications and new-generation projects and sees increasing interest in new-nuclear programs.

b)                  Industrial/Process business unit’s oil and gas segment and facilities management segment continue to be strong;

c)                  Mining business unit should continue to benefit from higher commodity prices and recently improved contract mining projects;

d)                 Energy & Environmental is well positioned for contracts in environmental remediation, nuclear operations, and laboratory site management;

e)                  Infrastructure business unit is gaining traction with its new, lower risk business model;

 

There are a couple of important headwinds going into 2007 and these are cited by management as reasons why EPS growth is not stronger in 2007:

 

a)      Energy & Environment business unit earned a usually large incentive payment (about $40 million) for achieving certain milestones at its Savannah River Project for the DOE.  This will not be repeated in 2007;

b)      Earnings on projects related to Iraq and the Middle East will be significantly lower in 2007 (these have already started to decline).  The Company earned $44 million on projects in Iraq during 2006 and expects this to decline by at least 50% in 2007.

 

 

Despite these headwinds, we think the Company’s earnings strength is likely to surprise the Street over the next 12 to 18 months.  Backlog has built up substantially, from $3.3 billion at year-end 2003 to $5.6 billion for 2006 and backlog quality has improved also as fixed price contracts have declined to only 20% of backlog.

 

2006 EBITDA was $168 million.  We think the Company can achieve $190 million or more in EBITDA in 2007.  Based on a net enterprise value of about $1.3 billion, the Company is trading at about 6.4x 2007 estimated EBITDA.  We think this is cheap on an absolute basis and compared to industry leaders, Fluor (FLR) and Jacobs (JEC), which appear to trade at close to 11x 2007 projected EBITDA.

 

Working capital/ Balance Sheets

 

We also think working capital should be a source of excess cash in 2007.  Management has stated they expect to be a strong cash flow year. 

 

The Company’s service business is generally not capital intensive and much of the capital invested is working capital related to start-up phases of projects rather than capital expenditures.  Most capital expenditures are for project specific mining projects representing upfront investment in mining equipment.  After the specific project is completed, the capital equipment is generally disposed, which has led to significant cash inflows over time to offset capital expenditures.

 

The Company’s working capital has increased over the past year and management cites two major reasons for the build up: 

 

a)                  Performance-based earnings in 2006 from the DOE (about $40 million) which will not be paid until Q1 2007;

b)                  Continued funding of losses on its highway projects, including $80 million in 2006.

 

We believe both of these items represent cash flow upside in 2007.  The Company will have spent over $130 million in cash funding highway project losses.  We believe the Company will eventually recover a significant amount of these losses from the project owners. 

 

Washington Group International - Balance Sheets
					2004	2005	2006
Cash & equivalents					$255	$238	$232
Restricted cash					$62	$53	$65
A/R, including retentions					$250	$276	$359
Unbilled receivables					$214	$256	$269
Investments or advances to construction JVs					$24	$57	$44
Deferred income taxes					$94	$108	$107
Total current assets						$1,028	$1,125
Investments in unconsolidated affiliates					$179	$172	$114
Goodwill					$308	$163	$97
Deferred income taxes					$64	$127	$228
Other assets					$18	$59	$38
PPE, net					$69	$101	$130
Total assets					$1,588	$1,649	$1,732
A/P including retentions					$206	$254	$335
Billings in excess of cost on uncompleted
contract					$204	$239	$152
Accruals					$203	$205	$192
Total current liabilities						$697	$718
Self insurance reserves					$68	$67	$68
Pension and post retiremt oblig					$103	$99	$87
Minority interest					$48	$6	$10
Shareholders equity					$733	$741	$798

 

 

 

 

 

 

 

Comparables

 

The Company trades at a discount to two of its larger industry peers, Fluor Corp (FLR) and Jacobs Engineering (JEC).

 

		Washington Grp. Intl (WGII)			Fluor Corp. (FLR)			Jacobs Eng. (JEC)
Price (3/6/07)		$57			$89			$88
Shares o/s		30			88			59
Market value		$1,695			$7,656			$5,192
52 week range		$47.0	$62.0		$73.0	$104.0		$65.0	$93.0
Cash		$292			$895			$340
Total debt		$0			$506			$97
Net debt		($292)			($389)			($243)
NOL valuation		($180)			$0			$0
Enterprise value (EV)		$1,223			$7,223			$4,949
Sales - LTM		$3,398			$14,408			$6,962
EBITDA - LTM		$168	5.0%		$450	3.1%		$332	4.8%
EBITDA - 2007		$190			$686			$450
EPS – 2006		$2.52			$2.70			$3.27
EPS - 2007		$3.00			$3.79			$4.00
Enter Value (EV) / LTM sales		36%			50%			71%
EV / LTM EBITDA		7.3x			16.1x			14.9x
EV / 07 EBITDA		6.4x			10.8x			11.0x
P/E – LTM		15.5x			32.0x			26.0x
P/E - 2007		13.7x			23.0x			21.0x

 

 

 

Major Shareholders:

 

The Company’s major shareholders are as follows:

 

Major shareholders
Greenlight Capital	2,762	9.3%
Friess Associates	1,227	4.1%
Jeffrey L. Gendell	999	3.4%
Rainier Investments	989	3.3%
Wellington Mgmt	892	3.0%
Barclays Global	854	2.9%

 

In addition, Dennis Washington has options for about 10% of company.

 

Disclaimer

 

Disclaimer:  We own shares of WGII.  We may buy or sell these shares at any time without notice.  The information in the write-up is believed to be correct as of the date written but VIC members should do their own verification of this information and analysis of this potential investment.  We undertake no obligation to update this write-up if new information arises at a future date.

 

 

Conclusions

 

Good long-term business which is not capital intensive

Attractive valuation on relative and absolute basis

End markets should have continued strong growth next few years

Earnings should increase strongly over next few years

Earnings and cash flow from claims realizations could significantly surprise the Street

Very strong balance sheet, probably over-capitalized

Excess cash and NOL reduce net enterprise value

Potential additions to earnings and cash flows from claims realizations

Potential LBO candidate

 

 

 

Risks

 

Highway projects continue to generate losses.

Revenues and backlog are very lumpy. 

Income can be volatile quarter to quarter.

Company fails to translate higher backlog into revenue and net income growth

The Company’s end markets head south in a major way due to U.S. recession or other.

Revenues/earnings from Iraq decline more sharply than expected

 

 

 

 

 

Catalyst

Good long-term business which is not capital intensive
Attractive valuation on relative and absolute basis
End markets should have continued strong growth next few years
Earnings should increase strongly over next few years
Earnings and cash flow from claims realizations could significantly surprise the Street
Very strong balance sheet, probably over-capitalized
Excess cash and NOL reduce net enterprise value
Potential additions to earnings and cash flows from claims realizations
Potential LBO candidate