(FWLT-NASDAQ) SUMMARY. Risk Level *

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1 September 05, 2014 Foster Wheeler AG Current Recommendation Prior Recommendation Underperform Date of Last Change 06/02/2013 Current Price (09/04/14) $32.24 Target Price $34.00 NEUTRAL (FWLT-NASDAQ) SUMMARY We are maintaining our Neutral recommendation on Foster Wheeler with a target price of $ In the second quarter, both of the company s segments reported revenue and backlog growth. Furthermore, new orders for the quarter increased. Its announcement of being acquired by AMEC strengthens its long-term objective of expansion across diverse sectors, including upstream, minerals and metals. Also, being a part of AMEC will benefit the company s continued growth in the energy sector and the increasing investments in the facilities to meet the growing demand. Recently, Foster Wheeler also received a number of contracts for front-end engineering work and subsequent work for engineering, procurement and construction. However, integration risks associated with the AMEC takeover is a bit concerning. SUMMARY DATA 52-Week High $ Week Low $23.18 One-Year Return (%) Beta 1.97 Average Daily Volume (sh) 657,758 Shares Outstanding (mil) 100 Market Capitalization ($mil) $3,226 Short Interest Ratio (days) 1.52 Institutional Ownership (%) 76 Insider Ownership (%) 1 Annual Cash Dividend $0.40 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) -9.7 Earnings Per Share (%) Dividend (%) N/A P/E using TTM EPS 20.1 P/E using 2014 Estimate 17.5 P/E using 2015 Estimate 15.1 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Low, Type of Stock Mid-Growth Industry Enginrg/R&D Svs Zacks Industry Rank * 89 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 943 A 803 A 735 A 3,415 A A 863 A 802 A 851 A 3,306 A A 852 A 970 E 1,027 E 3,630 E E 1,170 E 4,376 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $0.40 A $0.32 A $0.56 A $0.38 A $1.66 A 2013 $0.14 A $0.54 A $0.52 A $0.03 A $1.25 A 2014 $0.19 A $0.86 A $0.54 E $0.60 E $1.84 E 2015 $0.46 E $0.52 E $2.14 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Foster Wheeler AG (FWLT) is based in Zug Switzerland, but its operational headquarters are in Clinton NJ USA. The company operates through two business groups: the Global Engineering and Construction Group - or Global E&C Group - and the Global Power Group. Recently in Feb 2014, the company has signed a definitive sell-off agreement with its rival AMEC plc. As per the agreement, AMEC will be entailed to acquire all the issued and to be issued share capital of Foster Wheeler for about $3.3 billion or $32.69 per share (premium of 13.8% to Foster Wheeler s closing price of $ in Nov 2013, the trading day prior to the announcement of the potential acquisition. The purchase consideration consists of shares of AMEC stock along with a cash component of $16.00 in exchange of one outstanding share of Foster Wheeler common stock. Subject to regulatory approvals, the deal is expected to close in the second half of Foster Wheeler has been a market leader in mid-stream and down-stream oil and gas industry, which provided it the competitive advantage. However, the company was witnessing a growing need for capacity additions in a number of developing countries. This acquisition, while meeting these requirements, will also complement Foster Wheeler s long-term objective of expansion across diverse sectors including upstream, minerals and metals. Moreover, it will further enhance the company s presence in Middle East. AMEC s strength in the upstream exploration will perfectly complement Foster Wheeler s strengths to drive up both top and bottom lines. Foster Wheeler s existing shareholders will have a 23% stake in the combined entity. The Global E&C Group operates worldwide and designs, engineers and constructs onshore and offshore upstream oil and gas processing facilities, natural gas liquefaction facilities and receiving terminals, gas-to-liquids facilities, oil refining, chemical and petrochemical, pharmaceutical and biotechnology facilities and related infrastructure, including power generation and distribution facilities, and gasification facilities. The Global E&C Group provides engineering, project management and construction management services, and purchases equipment, materials and services from third-party suppliers and contractors. The Global E&C Group is also involved in the design of facilities in the new or developing market sectors, including carbon capture and storage, solid fuel-fired integrated gasification combined-cycle power plants, coal-to-liquids, coal-to-chemicals and biofuels. The Global E&C Group owns one of the leading refinery residue upgrading technologies (referred to as delayed coking) and a hydrogen production process used in oil refineries and petrochemical plants. Additionally, the Global E&C Group has experience and is able to work with a wide range of processes owned by others. The Global E&C Group performs environmental remediation services, together with related technical, engineering, design and regulatory services. The Global E&C Group is also involved in the development, engineering, construction, ownership and operation of power generation facilities, from conventional and renewable sources, and of waste-toenergy facilities in Europe. The Global E&C Group generates revenues from engineering and construction activities pursuant to contracts spanning up to approximately four years in duration and from returns on its equity investments in various power production facilities. The Global Power Group designs, manufactures and erects steam generating and auxiliary equipment for electric power generating stations and industrial facilities worldwide. Steam generating equipment includes a full range of technologies, offering independent power producers, utility and industrial clients high-value technology solutions for economically converting a wide range of fuels, including coal, lignite, petroleum coke, oil, gas, biomass and municipal solid waste, into high quality steam and power. Equity Research FWLT Page 2

3 Foster Wheeler s circulating fluidized-bed steam generator technology, which is referred to as CFB, is ideally suited to burn a very wide range of fuels, including low-quality and waste-type fuels, and it is generally recognized as one of the cleanest burning solid-fuel technologies available on a commercial basis in the world today. For both CFB and pulverized coal, which is referred to as PC, steam generators, FWLT offers supercritical once-through-unit designs to further improve the energy efficiency, and therefore, the environmental performance of these units. Once-through supercritical steam generators operate at higher steam pressures than traditional plants, resulting in higher efficiencies and lower emissions, including emissions of carbon dioxide, or CO2, which is considered a greenhouse gas. Further, for the longer term, FWLT is actively developing Flexi-Burn TM technology for CFB steam generators. It is anticipated that the Flexi-Burn TM technology will be an important part of an overall strategy for capturing and storing CO2 from coal power plants. This technology will enable the CFB steam generators to operate in oxygen-firing CO2 capture mode. In this mode, the CFB combustion process will produce a CO2-rich flue gas, which can then be delivered to a storage location while avoiding the need for large, expensive and energy intensive post-combustion CO2 separation equipment. Foster Wheeler also designs, manufactures and installs auxiliary equipment, which includes steam generators for solar thermal power plants, feedwater heaters, steam condensers and heat-recovery equipment. The Global Power Group also offers a full line of new and retrofit nitrogen-oxide, which is referred to as NOx, reduction systems, such as selective non-catalytic and catalytic NOx reduction systems as well as complete low-nox combustion systems. The company provides a broad range of site services relating to these products, including construction and erection services, maintenance engineering, plant upgrading and life extensions. The Global Power Group also conducts research and development in the areas of combustion, solid, fluid and gas dynamics, heat transfer, materials and solid mechanics. In addition, the Global Power Group owns and operates cogeneration, independent power production and waste-to-energy facilities, as well as power generation facilities for the process and petrochemical industries. The Global Power Group generates revenues from engineering activities, equipment supply and construction contracts, operating activities pursuant to the long-term sale of project outputs, such as electricity and steam, operating and maintenance agreements, royalties from licensing the company s technology, and generates equity income from returns on its equity investments in several power production facilities. In addition to these two business groups, which also represent operating segments for financial reporting purposes, Foster Wheeler reports corporate center expenses and expenses related to certain legacy liabilities, such as asbestos, in the Corporate and Finance Group, which is also treated as an operating segment for financial reporting purposes and is referred to as the C&F Group. The Global E&C Group s services include: Consulting: The Global E&C Group provides technical and economic analyses and study reports to owners, investors, developers, operators and governments. These services include concept and feasibility studies, market studies, asset assessments, product demand and supply modeling, and technology evaluations. Design and Engineering: The Global E&C Group provides a broad range of engineering and designrelated services. Design and engineering capabilities include process, civil, structural, architectural, mechanical, instrumentation, electrical, and health, safety and environmental management. For each project, Foster Wheeler identifies the project requirements and then integrate and coordinate the various design elements. Other critical tasks in the design process may include value engineering to optimize Equity Research FWLT Page 3

4 costs, risk and hazard reviews, and the assessment of construction, maintenance and operational requirements Project Management and Project Control: The Global E&C Group offers a wide range of project management and project control services for overseeing engineering, procurement and construction activities. These services include estimating costs, project planning and project cost control. The provision of these services is an integral part of the planning, design and construction phases of projects that are executed directly for clients. Foster Wheeler also provides these services to its clients through project management or program management consultant, where the company oversees on the client s behalf, the execution by other contractors of all or some of the planning, design and construction phases of a project. Procurement: Procurement activities focus on those projects, where Foster Wheeler also executes the design and engineering work. The company manages the procurement of materials, subcontractors and craft labor. Often, Foster Wheeler purchases materials, equipment and third-party services on behalf of its client, where the client will pay for the purchased items or services at cost and reimburse the company for the cost of such associated services plus a margin or fee Construction/Commissioning and Start-up: The Global E&C Group provides construction and construction management services on a worldwide basis. Construction, commissioning and start-up activities focus on those projects, where the company has performed most of the associated design and engineering work. Depending on the project, FWLT may function as the primary contractor or as a subcontractor to another firm. On some projects, FWLT functions as the construction manager, engaged by the customer to oversee another contractor s compliance with design specifications and contracting terms. In some instances, FWLT has responsibility for commissioning and plant start-up, or, where the client has responsibility for these activities, it provides experts to work as part of the client s team. Operations and Maintenance: FWLT provides project management, plant operations and maintenance services, such as repair, renovation, predictive and preventative services and other aftermarket services. In some instances, contracts may require FWLT to operate a plant, which it has designed and built, for an initial period that may vary from a very short period to up to approximately two years. The principal products of the Global Power Group are steam generators, commonly referred to as boilers. Steam generators produce steam in a range of conditions and qualities, from low-pressure saturated steam to high quality superheated steam at either sub-critical or supercritical conditions (steam pressures above 3,600 pounds-force per square inch absolute). The steam produced by steam generators can be used to produce electricity in power plants, to heat buildings and in the production of many manufactured goods and products, such as paper, chemicals and food products. Steam generators convert the energy of a wide range of solid and liquid fuels, as well as hot process gases, into steam and can be classified into several types: circulating fluidized-bed, pulverized coal, oil and natural gas, grate, heat recovery steam generators and fully assembled package boilers. The two most significant elements of FWLT s product portfolio are its CFB and PC steam generators. The Global Power Group s products and services include: Circulating Fluidized-Bed Steam Generators: The Global Power Group designs, manufactures and supplies steam generators that utilize FWLT s proprietary CFB technology. CFB combustion is generally recognized as one of the most commercially viable, fuel-flexible and clean burning ways to generate steam on a commercial basis from coal and many other solid fuels and waste products. A CFB steam generator utilizes air nozzles on the floor and lower side walls of its furnace to mix and fluidize the fuel particles as they burn, resulting in a very efficient combustion and heat transfer process. The fuel and other added solid materials, such as limestone, are continuously recycled through the furnace to maximize combustion efficiency and the capture of pollutants, such as the oxides of sulfur, which is refer Equity Research FWLT Page 4

5 to as SOx. Due to the efficient mixing of the fuel with the air and other solid materials and the long period of time the fuel remains in the combustion process, the temperature of the process can be greatly reduced below that of a conventional burning process. This has the added the benefit of reducing the formation of NOx, which is another pollutant formed during the combustion process. Due to these benefits, additional SOx and NOx control systems are frequently not needed. The application of supercritical steam technology to CFB technology is the latest technical development. By dramatically raising the pressure of the water as it is converted to steam, supercritical steam technology allows the steam to absorb more heat from the combustion process, resulting in a substantial improvement of approximately 5-15% in the efficiency of an electric power plant. As discussed above, FWLT is actively developing Flexi-Burn TM technology for the CFB steam generators. The company believes that the Flexi-Burn TM technology will be an important part of an overall strategy for capturing and storing CO2 from coal power plants. Pulverized Coal Steam Generators: The Global Power Group designs, manufactures and supplies PC steam generators. PC steam generators are commonly used in large coal-fired power plant applications. The coal is pulverized into fine particles and injected through specially designed low NO x burners. PC steam generators control NOx by utilizing advanced low-no x combustion technology and selective catalytic reduction technology, which is referred to as SCR. PC technology requires flue gas desulfurization equipment, which is referred to as FGD, to be installed after the steam generator to capture SOx. FWLT offers PC steam generators with either conventional sub-critical steam technology or more efficient supercritical steam technology for electric power plant applications. Industrial Steam Generators: The Global Power Group designs, manufactures and supplies industrial steam generators of various types including: CFB, as described above, grate, fully assembled package, field erected oil and gas, waste heat, and heat recovery steam generators. Depending on the steam generator type and application, industrial boilers are designed to burn a wide spectrum of industrial fuels from high quality oil and natural gas to biomass and waste type fuels such as tires, municipal solid waste, waste wood and paper. Auxiliary Equipment and Aftermarket Services: The Global Power Group also manufactures and installs auxiliary and replacement equipment for utility power and industrial facilities, including steam generators for solar thermal power plants, surface condensers, feed water heaters, coal pulverizers, steam generator coils and panels, biomass gasifiers, and replacement parts. Additionally, FWLT installs NOx reduction systems manufactured by third parties. The NOx reduction systems include SCR equipment and low-nox combustion systems for PC steam generators, which significantly reduce NOx emissions from PC steam generators. The Global Power Group also performs steam generator modifications and provides engineered solutions for steam generators worldwide FWLT provides a broad range of site services relating to these products, including construction and erection services, maintenance engineering, plant upgrading and life extension, and plant repowering. The Global Power Group also conducts research and development in the areas of combustion, fluid and gas dynamics, heat transfer, materials and solid mechanics. In addition, the Global Power Group licenses technology to a limited number of third parties in select countries or markets. FWLT serves the following industries: Oil and Gas; Oil Refining; Chemical & Petrochemical; Pharmaceutical; Environmental; Power Generation; and Power Plant Operation and Maintenance. FWLT markets its services and products through a worldwide staff of sales and marketing personnel, through a network of sales representatives and through partnership or joint venture arrangements with unrelated third parties. FWLT s businesses are not seasonal and are not dependent on a limited group of clients. Representative clients include state-owned and multinational oil and gas companies, major petrochemical, chemical, and pharmaceutical companies, national and independent electric power Equity Research FWLT Page 5

6 generation companies, and government agencies throughout the world. The majority of FWLT s revenues and new business originates outside of the United States. REASONS TO BUY Demand for energy will continue to grow over the long term and clients are expected to continue to invest in new and upgraded capacity to meet that demand. In this regard, Foster Wheeler was successful in booking a number of contracts for front-end engineering work and subsequent significant work for engineering, procurement and construction. Foster Wheeler s solid fundamentals continue to help it win contracts and retaining credibility to earn more contracts even after it signed a definitive sell-off agreement with its rival. Longer term, Foster Wheeler believes that the global demand for electrical energy will continue to grow and solid-fuel-fired steam generators will continue to fill a significant portion of this incremental generating capacity. The fuel-flexibility of industrial steam generators like CFB enable them to burn a variety of fuels other than coal and produce carbon-neutral electricity when fired by biomass. In addition, the company s steam generators can be designed to incorporate supercritical technology, which significantly improves efficiency and reduces emissions. Foster Wheeler is witnessing a growing need for capacity additions in a number of developing countries. There is often a preference for solid fuel boilers in these countries. The company s CFB technology continues to be its preferred solid fuel technology when a client has a hard-to-burn fuel or needs flexibility in fuel type. The alliance with AMEC will lead to an expansion in production capacity while increasing the efficiency across the vertical supply-chain. Asia offers the largest number of near and intermediate term prospects for solid fuel generation. The other bright spot for potential demand is the Middle East. This region is showing real promise as a potential market for solid fuel power generation, specifically in the opportunity to burn petroleum coke and in some cases, coal. Foster Wheeler is an undisputed market leader in solid fuel flexibility which provides it the competitive advantage in parts of the world that value and need this kind of power generation. AMEC s strength in the upstream exploration will perfectly complement Foster Wheeler s strengths to further enhance growth in the arena. Moreover, the company is focused on strengthening its business and gaining market share through strategic acquisitions to broaden its existing portfolio. REASONS TO SELL Number of constraining market factors impacted the company s top and bottom lines. These factors include weak Power generation markets across the globe, unstable environmental regulations in Europe and a similar situation, along with low natural gas prices in many regions have delayed the retrofit markets. Moreover, the prices of natural gas are expected to be on the lower side for several upcoming years owing to the increasing availability of the gas. In addition, the markets for renewable power have been depressing in many regions due to overbuilding during the past decade and current government reluctance to continue subsidization. Projects included in the company s backlog are usually long-cycle projects which may be delayed or cancelled, thereby impacting Foster Wheeler s operations and cash flows. The amount of backlog at the time of booking may not necessarily indicate future earnings related to the performance of that work. Backlog represents only business that is considered firm, although cancellations or scope adjustments do occur. Because of changes in project scope and schedule, the uncertainty associated with the actual Equity Research FWLT Page 6

7 realization of revenue always exists. Further, even where a project proceeds as per schedule, it is possible that parties may default and fail to pay. The company is subject to various environmental laws and regulations in the countries where it operates. If it fails to comply with these laws and regulations, it may incur significant costs and penalties. The company s business may be adversely impacted by regional, national and/or global requirements to significantly limit or reduce greenhouse gas emissions in the future. The company is exposed to severe risks, due to its acquisitions. Though acquisitions are expected to add to the company s growth, the integration risk involved is substantial. Also the integration process of the new acquisitions is disruptive to the company. The company s proposed acquisition by AMEC plc. is like to close in the second half of 2014 which is likely to negatively affect its results in the short-run. Moreover, the company is planning to acquire a couple of firms in the year, integration of which might prove to be challenging given the current circumstances. RECENT NEWS Foster Wheeler Q2 Beats Comprehensively Foster Wheeler AG reported second-quarter 2014 GAAP income of $85.6 million or $0.86 per share. Earnings were 79.2% ahead of the Zacks Consensus Estimate of $0.48. In the prior year quarter, the company had reported an income of $68.3 million or $0.68 per share. GAAP earnings included a favorable $32.5 million, or $0.32 per diluted share, settlement in connection with the terms related to the expiration of a steam generator technology license; the benefit of $22.3 million, or $0.22 per diluted share, from the reversal of interest, penalties and tax provision as a result of settlements with non-u.s. tax authorities; and $3.9 million, or $0.03 per share, of third-party transaction costs in connection with the previously announced acquisition of Foster Wheeler by AMEC plc. Excluding the impact of these three items and the asbestos provision, Non-GAAP income from continuing operations in the second quarter of 2014 was $35.9 million, or $0.35 per diluted share. Total Revenue Overall operating revenues for the quarter declined 1.4% to $851 million year over year versus $863 million reported in the prior year quarter. The company s consolidated revenues (FW Scope) in the quarter were $725 million, an increase of 13% compared with $642 million reported in the prior year. Increase in company s revenues was driven by strong performance of the Global Engineering and Construction group and decent performance by the Global Power group. Segment Results Global Engineering and Construction (E&C) group s operating revenues (FW Scope) stood at $522 million, while its new orders grew 1.5% year over year. Revenue growth was driven by increased volume of work and a healthy backlog level. Global Power Group (GPG) operating revenues (FW Scope) stood at $204 million, up 5% from $199 million in the year-ago quarter. The increase was attributable to a continued increase in the orders. However, in the quarter the segment reported a healthy increase in backlog level, which is expected to lead to improved segment revenues going forward. Equity Research FWLT Page 7

8 Income & Expenses Contract profit in the quarter was $135.0 million, down 12.1% from the prior-year quarter, primarily due to a decline in operating revenues. The company s selling, general and administrative expenses (SG&A) expense stood at $83.0 million, declining from $89.8 million in the year-ago quarter. E&C s EBITDA was $56.4 million in the quarter, down from $62.1 million in the prior-year quarter. GPG's EBITDA was $64.1 million, an increase from $45.6 million in the prior-year quarter. Balance Sheet Exiting the quarter, the company s cash and cash equivalents were $518.5 million, down from $556.2 million at the end of Dec 31, Long-term debt was $102.5 million, down from $113 million at the end of Dec 31, Shareholders equity was $843 million, up from $750.1 million at the end of Dec 31, Looking Ahead Foster Wheeler remains positive about its growth in 2014, owing to the healthy backlog and new wins, especially the performance of its E&C segment. The company also expects its utilization rate in the year to benefit significantly from the increasing volume in the business. Also, the company s recent alliance with AMEC is expected to aid growth going forward by expanding its production capacity. Alongside, it is likely to strengthen the vertical supply chain. VALUATION Foster Wheeler s current trailing 12-month earnings multiple is 20.1x compared with the 38.2x average for the peer group and 18.4x for the S&P 500. Over the last five years, shares of FWLT have traded in the range of 8.2x to 27.3x trailing 12-month earnings. Our Neutral recommendation on the stock indicates that it will perform in line with the broader market. Our target price of $34.00, or 18.5x 2014 EPS, is well within the historical range. Equity Research FWLT Page 8

9 Key Indicators P/E F1 P/E F2 Est. 5-Yr EPS Gr% P/CF P/E P/E 5-Yr High P/E 5-Yr Low Foster Wheeler AG (FWLT) Industry Average S&P KBR Inc. (KBR) Quanta Services Inc. (PWR) Arcadis NV (ARCAY) CDI Corp. (CDI) TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Foster Wheeler AG (FWLT) Industry Average S&P Equity Research FWLT Page 9

10 Earnings Surprise and Estimate Revision History Equity Research FWLT Page 10

11 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of FWLT. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1116 companies covered: Outperform %, Neutral %, Underperform 5.8%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research FWLT Page 11