Wednesday, FBR Capital Markets initiated coverage of Michael Baker Corp. (BKR) stock with a Market Perform rating and a price target of $45. The brokerage established its 2009 EPS estimate of $2.99, its 2010 estimate of $2.25, and its 2011 estimate of $2.65.
Analyst Alex Rygiel noted that Baker is an engineering and consulting firm that provides services predominantly to the federal government, transportation, and civil infrastructure end markets. Given the recent sale of its energy unit, which completes a multiyear reorganization, the company is now positioned to focus solely on its core engineering business through internal growth initiatives, positive end-market trends, and a strong balance sheet that could be used for acquisitions.
The stock has been trading at a discount to other larger engineering/construction management firms. However, the analyst believes that the spread will narrow over time. The analyst's price target of $45 represents 20x his 2010 EPS estimate, or 14x adjusted P/E, giving credit for $14.00 per share of cash on the balance sheet.
On an EV/EBITDA basis, this equates to 6.6x the analyst's 2010 estimate and is in line with peer multiples. However, at 8x, BKR's 10-year trailing-12-month average EV/EBITDA multiple, the share price would approach $51. Near-term concerns include consensus expectations that the analyst believes does not fully reflect the asset sale and the likely gap in equity income in first half of 2010 due to contract expirations.
Currently, BKR is down $0.12 or 0.29% and trading at $40.74.
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