(RTTNews) - Friday, KeyBanc Capital upgraded Willbros Group Inc. (WG: News ) shares to Buy from Hold with a price target of $21. The brokerage lowered its 2009 EPS estimate to $0.55 from $0.87, and its 2010 estimate to $0.63 from $1.05.

Analyst Tahira Afzal attributed the upgrade based on improving end markets, utilization outlook. Following WG's third quarter conference call and the analyst's follow-up discussion with management, he upgraded the stock to Buy on increasing signs that utilization rates in WG's core operations might be at a trough.

Furthermore, the analyst's follow-up discussion with management makes us incrementally comfortable that cost issues on a legacy project announced in third quarter of 2009 are fairly contained and subsequent bookings incorporate rigorous process changes and due diligence to limit similar recurrences.

The analyst highlighted that unlike most traditional E&C names, WG has material operating leverage, which is partly the reason for the steeper than expected EPS decline in 2009, he expects that as utilization rates tick up, WG could meet and possibly exceed his EPS estimates for 2010 and 2011.

This is particularly so given cost reduction initiatives that continue to be enacted and are only partly factored in the analyst's forward-looking estimates. Also, WG continues to trade at close to its book value of $12.50 per share, which presents a good entry point for investors that are more value-conscious.
The analyst's upgrade is not without caveats, following the steep stock appreciation yesterday on a good bookings quarter, he is cautious that the near-term may remain choppy, and consistent bookings growth will likely only return in the second half of 2010 time frame.

Furthermore, WG remains exposed to a largely fixed price business model, and the company is looking to grow in new geographies, while this is exciting, it comes with some additional risk, the analyst believes that he has amply captured this risk in his much below normalized margin assumptions for 2011.

The analyst views WG as perhaps one of the higher risk/reward energy stories and view sentiment as bottoming and likely to correct up during the course of 2010.

Currently, WG is up $1.25 or 8.53% and trading at $15.91.

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by RTT Staff Writer

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