) --

Foster Wheeler

shares slumped Monday on news of the surprise resignation of CEO Robert Flexon after just five months at the top, but Wall Street was so far being fairly understanding about the change.

"An underpriced stock whose business appears at the early stage of a cyclical recovery for its energy and power related services," said Jefferies & Co. in a research note reaffirming its buy rating on the stock. "We expect the Board will most likely pay added attention to strategic and structural issues while assessing company needs and the CEO-void."

Umberto della Salla, the company's president and chief operating officer, will serve as interim CEO. He will get support from Raymond Milchovich, the company's current non-executive chairman, who Flexon replaced in the CEO role when he joined Foster Wheeler at the beginning of June.

Shares of the engineering and construction services company finished down 5.7%, or $1.38, at $22.65 on volume of 7.9 million, almost four times the issue's trailing three-month daily average of roughly 2 million. Year-to-date, the shares are down more than 18%.

On a conference call held Monday morning to discuss the change, Foster Wheeler executives said near-term results weren't a major factor in Flexon's departure and that the results of the company's ongoing strategic review would now be revealed in February 2011, rather than the fourth quarter of 2010, as previously expected, according to Jefferies, which has a bullish $33 price target on the shares, and called Flexon's departure "a surprise but not a complete shocker."

"We believe the accelerated headquarters move to Switzerland and the uncertain global economic and contracting market witnessed rushed an untenable transition," Jefferies said.

Canaccord Genuity had a similar take on the situation as it reiterated a buy rating and $37 price target on Foster Wheeler shares.

"Our worst fears (that Mr. Flexon did not like what he found during the strategic review etc.) were alleviated within the opening minutes of the call," the firm said. "In short, former CEO and current Non-Executive Chairman, Ray Milchovich, and the board did not feel Mr. Flexon's leadership abilities were a good match with the prevailing culture at Foster Wheeler."

Earnings expectations stayed the same at Canaccord, which said it felt Foster Wheeler's commercial relationships are for the most part attributable to della Sala, who has been with the company since 1973. The firm justified its above-consensus target price for the stock by noting Foster Wheeler's stock is currently trading at 9.2X fiscal 2011 earnings estimates compared to P-E multiples of 14.5X and 15X for competitors

Fluor Corp.

(FLR) - Get Report


Jacobs Engineering

(JEC) - Get Report

, respectively.

BMO Capital Markets also weighed in, hinting that the hovering presence of former CEO Milchovich adds a twist to Foster Wheeler's CEO search, which is expected to take six-to-seven months.

"Non-Executive Chairman Ray Milchovich, who ran the

conference call, repeatedly said Mr. Flexon was 'not a good fit,' the firm noted, adding that Milchovich, who has twice retired from Foster Wheeler, could look to stick around past November 2011, when his current consulting contract is set to run out, if no new leader is found. "He

Milchovich has a higher profile than other non-executive chairmen at other companies, and while we have always said his were tough shoes to fill, it will be that much harder if he is still in them."

BMO Capital is less bullish on Foster Wheeler than Jefferies or Canaccord with a market perform rating, the equivalent of a hold, on the stock, but says it's still bullish on the company long-term because of its exposure to the energy and power industries in emerging markets. Near-term is another story.

"This quick hook on the CEO and delay to the strategic review will further delay any catalyst to unlocking value in the stock," the firm told clients.

Foster Wheeler is slated to report its third-quarter results on Nov. 5. The current average estimate of analysts polled by

Thomson Reuters

is for a profit of 51 cents a share in the September period on revenue of $1.09 billion. The company, which has its headquarters in Geneva, has missed Wall Street expectations in the last two quarters by an average of 12%.

Reflective of the optimism seen in the initial reaction to the news, Wall Street is overwhelmingly bullish headed into the third-quarter report. Of the 18 analysts covering the company, 14 are at either strong buy (7) or buy (7), and the median 12-month price target for the stock sits at $30.50, implying upside of around 33%.

Foster Wheeler mainly provides industrial construction and engineering services, serving the oil and gas, power generation, biotechnology and pharmaceutical industries. It reported earnings before items of $61.2 million, or 48 cents a share, on revenue of $1 billion for the second quarter ended in June.


Written by Michael Baron in New York.

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