Controlling Expenses is the Name of the Game (FWLT, RIG)

This morning, Foster Wheeler Ltd. (NASDAQ:FWLT) and Transocean Inc. (NYSE:RIG) both reported earnings before the market opened. Both reported good earnings, but there are some warning signs to note in each.

At Foster Wheeler, the engineering and construction giant reportedearnings of $160.8 million (EPS of $1.11) on revenues of $1.7 billion.Analysts had been expecting EPS of $0.84 on revenues of $1.74 billion,so the company came pretty close. However, Foster Wheeler’s operatingexpenses increased by $450 million over the same period a year ago.That’s a whopping 42% jump.

Overall, though, Foster Wheeler performed very well. Net margin came inat 9.45%, compared with 6% in the comparable quarter a year ago. Themarket seems to like it because the stock is up more than 5% in earlytrading.

Transocean, the largest offshore driller in the world, reportedearnings for the 2008 second quarter of $1.1 billion (EPS of $3.45) onrevenues of $3.1 billion. Analysts expected EPS of $3.23 on revenues of$3.05 billion. Earnings doubled over the same period last year, mainlyas a result of Transocean’s merger with GlobalSantaFe, which wascompleted in November 2007. Transocean did not provide pro forma datafor 2007 to allow comparison of apples to apples.

Transocean’s second quarter revenues were down $8 millionyear-over-year, which the company attributed to "out-of-service timefor planned shipyards," offset by higher dayrates and other factors. Itnow costs $238,600/day to lease one of Transocean’s rigs.

There’s interesting comparison to be made between these two companies.Foster Wheeler’s revenues equaled about 45% of Transocean’s, butTransocean’s operating expenses were lower in absolute dollar terms.Yet Transocean’s stock opened about 1% lower this morning. What kind ofreward is that for good performance?

Paul Ausick
August 6, 2008