VLO - Key Takeaways From Babcock & Wilcox Q4 2022 Earnings Report

2023-04-06 11:26:39 ET

Summary

• Mixed Q4/2022 results discussed.
• Opportunities grow as backlog increases.
• Buy Babcock & Wilcox stock on weakness.

In the last year, investor enthusiasm for the stock market weakened, pulling clean energy stocks lower. Babcock & Wilcox ( BW ) lost nearly one-quarter of its value in that time . The company announced several contract wins, dampened by a mixed fourth-quarter earnings report. When it reaffirmed its outlook for this fiscal year, BW stock lost momentum recently. Selling pressure accelerated at around $6.00.

Shares might establish a wider trading range in the year ahead amid uncertain stock market conditions. This would give clean energy investors a chance to consider accumulating a position at lower prices.

Mixed Fourth Quarter 2022 Results

In the last quarter, Babcock & Wilcox earned two cents a share as revenue grew by 30.0% Y/Y to $250 million. Its bookings of $197 million are similarly as strong as the year-ago period. Annual bookings are at highs not seen since 2017 after it increased to $908 million . Its backlog grew by 19% Y/Y to $704 million.

BW stock climbed from around $5.00 to as high as over $6.00 in reaction to the pipeline expanding to $8 billion of identified opportunities. The near-term drop is potentially profit-taking. The chart below indicates resistance at the 50-day simple moving average.

The stock could just as likely find support at the 20-day SMA at around $5.60.

Chief Executive Officer Kenny Young cited the current visibility for new booking opportunities in his confidence for Babcock's growth in 2023. The company will post adjusted EBITDA of $100 million to $120 million.

The firm has a robust pipeline of projects and upgrade opportunities ahead. In particular, its BrightLoop Hydrogen Production Technology should benefit from expanding opportunities for generating hydrogen with CO2 capture. This complements its renewable and environmental technologies. SolveBright, for post-combustion CO2 scrubbing , and OxyBright, which is carbon capture for steam generation , are two such technologies.

Last year, Babcock booked seven renewable waste-to-energy new build projects. More recently, it announced a waste-to-energy and biomass-fueled power plant contract worth $14 million . The engineering services and advanced technologies for a plant in the U.K. are worth around $65 million . The company did not disclose the value of the carbon capture contract from Phillips 66 ( PSX ).

Related Energy Stocks

Energy investors should consider complementing their holdings in Phillips 66 ( PSX ) and Valero Energy ( VLO ) with Babcock & Wilcox stock.

The clean energy provider has fair profitability scores, compared to the former two firms. However, those firms have strong momentum scores, reflecting their recent rally. By comparison, the C- grade on Babcock's momentum suggests the stock is at an attractive buying price.

The small-cap stock will not earn a strong buy rating until its profitability grade improves. Its net interest margin and return on common equity are negative. The sector median has positive percentages on all measures:

Opportunity

CEO Young said that the company will experience an increase in its pipeline for OxyBright in sequestering CO2 . The supply chain disruption did not change much. As it normalizes, faster access to raw materials like steel will enable the company to fulfill orders sooner.

Young mentioned that licensing for its waste-to-energy technology in China and India is experiencing some growth. However, investors should set low expectations. China's economy is slow to rebound from the Covid-19 lockdown. Companies in China may not prioritize clean energy solutions until prospects improve in late 2023 to early 2024.

CEO Young is hopeful that the U.S. Department of Energy will proceed with its investments and voice support for its projects in the coming months. Investors will require patience. Young said that "It's not going to be a quick road to an influx of cash to support the commercial demonstration."

Risks

Babcock & Wilcox do not have much room to report disappointing results. In Q4, net income fell from $30.2 million last year to $5.7 million. Adjusted EBITDA fell by 10.1%. The stock rebound post-earnings failed to hold. Still, the lower income is primarily attributable to two acquisitions that closed last Feb. 2022.

The company will need to realize its significant backlog while maintaining its booking momentum. That would convince clean energy investors that its revenue potential will rise from its current levels. As a result, the company should meet or even exceed its outlook expectations.

Your Takeaway

Consider Babcock & Wilcox as a core clean energy holding. It would complement investments in oil and gas stocks. Governments will continue to encourage firms to implement decarbonization and carbon capture solutions.

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