ONLINE : SEPTEMBER 15, 1997 ISSUE|
|INSIDE WALL STREET
Keep An Eye On This Power Source
Stewart & Stevenson Services (SSSS) seems to have missed the bull market. Shares in the Houston-based manufacturer of power-generation systems, at 24 5/8, sold at nearly 54 in early 1994. A fall-off in earnings has driven the stock southward since. Indeed, on Aug. 25, the company reported second-quarter earnings of 25 cents a share. Wall Street had forecast 37 cents.
But rather than sink the stock further, the news prompted buying. Pros are betting that the worst is over. ''You make the most money in a stock when earnings are accelerating,'' says Neil Eigen, portfolio manager of Seligman Small-Cap Value Fund. ''And Stewart & Stevenson is entering that phase.''
The company builds power-generating plants around modified jet aircraft engines. The low cost and quick construction time--a plant can be online in three months--make it an ideal power source in developing countries. The plants are operating in 32 foreign countries, including China and Russia.
Privatization in many developing nations slowed new orders, says Eigen, as state-owned utilities shifted to the private sector. But now construction is picking up. Adds George Gaspar, an analyst at Robert W. Baird: ''The company should book as much turbine business in the next two quarters as they had in the last three.''
Stewart & Stevenson also stand to land new business in the U.S., where the uncertainty posed by deregulation has all but halted new construction. Company spokesman Donald Stewart says that when U.S. power producers start adding capacity, these plants will fit the bill. ''The next wave of plants will be smaller and closer to the service areas,'' says Stewart.
While turbines are expected to rev up the earnings, they're not the whole business. With about $2 billion in sales companywide, Stewart & Stevenson also makes gas-compression equipment for the energy industry, builds trucks for the U.S. Army, and sells and services machinery manufactured by others. Eigen says the stock could sell in the 35-to-40 range in 12 to 18 months.
BY JEFFREY M. LADERMAN
CHART: Earnings Rev Up
E-Mail to Business Week Online