Foster Downgraded to Underperform

We downgraded our long-term recommendation on L.B. Foster Company (FSTR) to Underperform from Neutral on Aug 22, 2013, due to weak results for the second quarter of 2013.

Why the Downgrade?

Foster reported weak results for the second quarter of 2013, with adjusted earnings per share of 71 cents, declining 17.4% year over year. Earnings also missed the Zacks Consensus Estimate of 98 cents by 27.6%. Revenues for the quarter came in at $149.9 million, down 8.1% year over year, and also missed the Zacks Consensus Estimate of $175.0 million.

The decline in results was due to a reduction in the Rail Products and Construction Products segments' sales. Rail Products segment’s sales declined 10.3% year over year to $90.9 million, due to a drop in the concrete tie and rail technology businesses, which was partially offset by stronger sales in the transit products division. Also, Construction Products segment’s sales dropped 8.7% year over year to $43.7 million, on the back of a weakness in fabricated bridge business.

Moreover, Foster expects the revenue mix to change in the second half of 2013, with Tubular, Construction and Rail segments generating 4%, 29% and 67% of total revenue, respectively. With the contribution increasing from low-margin Construction Products, but declining from the high-margin Tubular Products, margins are expected to decline further in the second half of 2013.

Additionally, the presence of many players in the industry endangers the company’s growth prospects. Also, a negative revision of spending by public and private institutions on various projects impacted the company’s revenues.

Other Stocks to Consider

Foster currently carries a Zacks Rank #5 (Strong Sell). Other stocks worth a watch in the services industry are Ternium S.A. (TX), DXP Enterprises, Inc. (DXPE) and ScanSource, Inc. (SCSC). Each of these companies carries a Zacks Rank #2 (Buy).

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