Q: I get it that general-contractors like BDT are exposed to cyclicality in ways that engineering-and-design co's like WSP are not, but then I compare their P/E ratios (20.5 vs 54.5) and wonder if the latter could ever grow as much as the former - or is BDT's low P/E just a fact of life in cyclical sectors, such that it's the one that's growth-limited?
5i Research Answer:
We typically look at forward P/E ratios, but the case still stands where BDT trades at 13x and WSP at 29x. Size is an important factor for these types of companies and WSP is nearly 20x larger in terms of market cap compared to BDT. Growth is contract driven so reputation is important for a company like BDT. We think BDT could be due for some P/E expansion as the company has been executing at a high level recently, pays a solid yield, has a solid balance sheet, and has been acquisitive. While size and cyclicality is a big factor for WSP's valuation premium and BDT may not be able to reach that scale in the near-term, we think the growth potential is there and multiple expansion is possibly on the table.