Small-Cap Spotlight: Shaw

In last quarter's conference call, management said it is seeing difficulties in its E&I segment because of lack of bookings. This shortfall was not reflected in last quarter's results since the nuclear deal with China offset the weakness. The company estimates that the first nuclear plant will not become operational until 2013, so I would argue that Shaw will not see additional nuclear orders from China in the short term. If this is the case, Shaw will have to find ways to offset weakness in its largest division in order to meet full-year guidance.

Turning to the international front, where I believe infrastructure has much more potential as underdeveloped countries become more mainstream, Shaw has little exposure compared with its peers, with less than 15% of annual revenue coming from outside the U.S. This includes the $700 million deal from China that the company booked in its $11 billion backlog as of last quarter.

In comparison, Jacobs Engineering received 35% of its 2006 total revenue from abroad, while Fluor received 55% of its revenue outside the U.S. This diversity in revenue should be viewed as a positive for Shaw's competitors, since some economists believe that growth in the U.S. will slow over the next 12 months.

Another risk worth mentioning is that Shaw has delayed its second-quarter filing because of an independent review of a $39 million project -- estimated costs for the project may be in error. The amount is very small when compared with the billions the company has in its backlog, but more important, Shaw changed auditors at the time of this announcement back in April. This review may prove to be trivial, but is it worth it for investors to take this risk?

Shaw has less international exposure and a higher valuation -- with the same growth potential -- as its peers. If you believe that infrastructure is in the early stages of a secular growth trend, I believe you would reduce risk substantially by selling out of Shaw and buying either Jacobs Engineering or Fluor.

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