Mason Capital Management has filed a Form 4 with the SEC to report that it has bought an additional 100,000 shares of Babcock and Wolcox Company (NYSE:BWC), an industrial company that produces power generation systems- such as steam boilers- for power plants and other customers. The company’s Nuclear Operations division also produces nuclear reactors to be used on Navy ships. Mason Capital, managed by Kenneth Mario Garschina, focuses on basic materials but Babcock and Wolcox was the second largest stock holding the fund reported in its 13F portfolio for the first quarter of 2012. The most recent purchases occurred last week at an average price of $25.14 per share; the stock is slightly lower than this price, between $24.80 and $24.90, bringing it to a small gain for the year. Read previous coverage of Mason’s investment in BWC and see the rest of Mason Capital Management’s portfolio.
According to 13F filings, Mason Capital easily is the top hedge fund owner of BWC at 14.7 million shares, and has been for quite some time, but others had positions in Babcock and Wolcox. Glenview Capital, which is managed by former Omega Advisors trader Larry Robbins, had 3.2 million shares at the end of March (see Glenview’s other stock picks). Glenview Capital increased its holdings 27% in the first three months of 2012 compared to what it owned at the beginning of the year. D.E. Shaw owned 700,000 shares of the company, and while this represents a small position for the fund it was more than quadruple its position from the beginning of January (find other stocks that D.E. Shaw is piling into).
Babcock and Wolcox is a $3 billion market cap company with a trailing price-to-earnings multiple of 14.5. As a business which primarily serves utilities, it is expected to experience little growth though its first quarter was much stronger than the same quarter of the previous year, with revenue growth of 11%. The increase in quarterly revenues was driven by higher sales in the Power Generation business, with Nuclear Operations being flat compared to the previous year. Babcock and Wolcox won a $73 million contract from the Navy for the Nuclear Operations division earlier this month, potentially strengthening that business unit as well.
Several comparable businesses to BWC’s are private, but Foster Wheeler (NASDAQ:FWLT) includes a Global Power division that performs much of the same work. Foster Wheeler, which also includes an oil and gas engineering and construction division, is priced lower at a trailing P/E of 11 and a forward P/E of 8. FWLT did see a revenue decrease, but an increase in margins that resulted in higher net income, in the first quarter of 2012 compared to Q1 2011. Foster Wheeler’s stock is down about 13% for 2012 and over 40% since a year ago. Large-cap businesses in the Diversified Machinery industry, which can also be considered if an investor is looking for a larger sample of peers, include Cummins (NYSE:CMI), a provider of engines and power generation systems, and General Electric (NYSE:GE), which among its many other businesses produces turbines and generators. Cummins trades at P/Es under 9 while GE- which, of course, carries a strong leadership position, a well-known brand, and a variety of other business lines- is expected to grow its business this year and has a forward P/E of 12. So far this year Cummins is about flat while General Electric is up 10%.
Should investors take advantage of the fact that they can buy into Babcock and Wolcox Company at a lower price than a major owner? Mason Capital would likely have tried to diversify its portfolio a bit more unless it was confident that BWC was a buy at current prices, and perhaps the company’s utility customer base is less exposed to a downturn in the U.S. economy than many other stocks are. However, the company’s peers, with its closest comparable being Foster Wheeler, seem to be better values with less exposure to defense-related contracts. Investors may find these companies to be better buys.
