Babcock & Wilcox May Have Less Upside Than Its Peers

Babcock & Wilcox Enterprises Inc’s BW equipment and aftermarket power businesses are likely to continue facing secular headwinds; and the company’s diversification strategy could take time to pay off, Credit Suisse’s Jamie Cook said in a report. He downgraded the rating on the company from Neutral to Underperform, while reducing the price target from $17 to 16.

Analyst Cook mentioned that Babcock & Wilcox’s shares had less upside than those of the peer group. He added, “In our opinion, B&W's peer group has more favorable long-term growth opportunities coupled with comparable benefits from cost cutting actions when end markets recover.”

Secular Headwinds

Babcock & Wilcox’s equipment and aftermarket power businesses have been under pressure from a secular decline in US coal; and this trend would likely continue, Cook stated. These businesses represent a little less than 50 percent of the company’s total sales, even after account for recent acquisitions.

Diversification To Take Time To Yield Results

Given the challenges in growing its coal business, Babcock & Wilcox has taken “proactive measures” to diversify into industrial power and energy markets as well as shift focus overseas. However, demand for industrial markets had been deteriorating.

“We expect these challenges to persist throughout 2017. Furthermore, we believe organic initiatives to grow the renewables business and overseas sales will pay off over time. However more recently these initiatives have not been without operational execution issues, which have been a bigger drag on EPS vs. expectations,” the analyst commented.

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