A prudent trio in engineering

by John Buckingham, editor The Prudent Speculator

We like stocks. And we like a lot of ‘em. We focus on broadly diversified investments in undervalued stocks for their long-term appreciation potential.

Our recommended stocks all trade for significant discounts to our determination of long-term fair value and/or offer favorable risk/reward profiles. Here's a trio of our latest featured stocks that are involved in construction and engineering sectors: Timken Co. (TKR), Tutor Perini (TPC) and URS (URS).

Timken manufactures a broad range of products for friction management and power transmission. Its products are sold to numerous attractive end markets, such as mining and construction, oil and gas, industrial machinery, aerospace, rail, agriculture and automotive.

Additionally, Timken has done a commendable job of strategic geographic expansion, with a 15% annual growth rate in emerging market economies over the past 10 years.

TKR has recently been in the news as activist investors have urged the firm to spin off its steel unit to unlock shareholder value. The shares spiked, but we still find them attractive as TKR trades with a P/E multiple of 9 and an Enterprise Value/ EBITDA multiple of 4.4.

Tutor Perini is one of the largest construction services firms in the U.S. It has a market leading position in heavy civil and large complex building projects and also provides a variety of services to the U.S. military, government agencies and corporations.

We were pleased to see the firm report solid Q3 results, including an affirmation of full year 2012 guidance of revenue between $4.0 billion and 4.5 billion and diluted EPS (excluding one-time items) of $1.50 to $1.70.

While shares are up in 2012, they are still off 52 week highs by more than 25% as ongoing economic and political conditions have delayed the timing of awards and start of new projects. However, we believe that demand will rebound and investor interest in the shares will return.

TPC trades at 8 times the midpoint of full-year 2012 expectations. Further, it’s worth noting that Tutor’s solid balance sheet provides management with operational flexibility.

URS is now the largest design firm in the U.S., providing a variety of planning, engineering, operating and maintenance services. Its network spans 41 countries and provides services to domestic and foreign federal, state and local government agencies, as well as private sector clients representing numerous industries.

Once enamored by the URS business mix, which includes long-term Department of Defense and Department of Energy contracts, investors have shown little love this year as concerns over government budgetary right-sizing remain center stage.

While U.S. government contracts are an important piece of the puzzle, the firm has a backlog valued at $13.8 billion and has shown recent strength in its oil and gas businesses (Flint has a strong service presence in the Canadian oil sands).

Additionally, we still believe that URS should benefit from an increase in power (including nuclear) retrofit opportunities. URS has a healthy balance sheet and strong cash flow, which management has used for share buybacks and this year’s introduction of a quarterly dividend.

Learn more about this financial newsletter at John Buckingham's The Prudent Speculator.

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