An essential metric in valuing engineering and construction companies is the current state of their backlog and how that backlog fares in the current global economic backdrop.

By definition, a backlog is the total value of sales and orders by clients waiting to be filled by the company. Generally speaking, increase or decreases in a company’s backlog might indicate the future direction of sales and forward earnings.

Right now, there are a bunch of companies whose current backlog is substantially higher than the entire value of the company. This makes them prime takeover targets, as future contract orders and sales will more than cover for the value of the firm, plus any additional premium a bidder might make.

This group does not include any financials, so no Washington Mutual (WM) or Wachovia (WB), and there aren’t any tech plays such as Apple ( AAPL) or Microsoft (MSFT), but there are some real opportunities here.

Shaw Group (SGR): Shaw Group has a $4.08 billion market cap, with a stated backlog of about $16.5 billion. Shaw Group’s backlog is broken down into five main business segments: fossil and nuclear, maintenance, energy and chemicals, fabrication and manufacturing, and environmental and infrastructure.

Shaw’s fossil and nuclear division backlog is worth about $6.7 billion alone, with about $1 billion in new orders coming in the second quarter of 2008. This part of Shaw’s business is an industry leader in the gas-, coal- and nuclear powered facilities space, recently executing six new coal-fired projects in England. For the third quarter of 2008, Shaw’s fossil and nuclear business has been already awarded $498 million worth of sales. EBITDA margins for this portion of the business are at $48.3 million vs. third-quarter 2007's $27.9 million. If John McCain starts to pick up steam, this could be huge.

Shaw Groups maintenance business currently has a backlog of $1.5 billion, with about $200 million in new orders coming in the second quarter of 2008 as well. This part of the backlog focuses mostly on expanding the life and capacity of older fossil and nuclear planets. For the third quarter of 2008, the maintenance portion of the business was recent awarded $215 million worth of sales. EBITDA margins for this portion of the business are at $14.9 million vs. third-quarter 2007's $14.6 million.

The energy and chemicals portion of the business currently has a backlog of $2.3 billion, mostly based around various refinery expansion projects. Currently Asia and the Middle East are expected to increase processing of the world’s petrochemicals from about 25% to more than 55% in the coming decade due to various economics of sale. Shaw is poised to capture this market segment. For the third quarter of 2008, Shaw’s energy and chemical business was awarded $424 million in new contracts coming from Hyundai Engineering and various Middle East nations.

EBITDA margins for this portion of the business are at $33.7 million vs. third-quarter 2007's $16.4 million.

At about $700 million in sales, fabrication and manufacturing represents the smallest portion of the total backlog. Here Shaw is the leading provider of piping solutions for power plants and was recently awarded a $112 million contract for a multinational Midwest U.S. client. EBITDA margins here for this portion of the business are slipping at $24.8 million vs. last quarter’s margins of $32.8 million and second-quarter 2007 margins of $25.0 million. Here the likely culprit is the rising price of steel used in Shaw's piping solutions.

Environmental and infrastructure represents about $5.2 billion (the highest in the company’s history) worth of business. Here Federal spending remains steady, with continued focus on terrorism and military transformation. For the third quarter, Shaw won a whopping $2.7 billion worth of contracts, with $2 billion coming from a final construction contract modification for the Department of Energy’s mixed oxide, or MOX, fuel fabrication facility.

In 1999, the National Nuclear Security Administration signed a contract with Shaw AREVA MOX services (a sub-company within Shaw Group) to design, build and operate a MOX fuel fabrication facility. This facility will be a major component in the U.S. program to dispose of surplus weapon-grade plutonium. Construction of the 600,000 square foot facility requires over 170,000 cubic yards of concrete, 35,000 tones of reinforcing steel, 23000 instruments, 1,000 tons of heating and air condition vents, 500,000 feet of conduit, 47,000 feet of cable tray, 3,000,000 feet of power and control cable and 80 miles of piping

When all is said and done, the MOX fuel fabrication facility will be capable of turning 3.5 metric tons of weapon-grade plutonium into MOX fuel assemblies annually.

Back to the company's backlog, Shaw expects that over the next 12 months, 40%, or $6.5 billion, of its backlog will be converted into actually sales. It expects another 25%, or $4.1 billion, to be converted over the next 13 to 24 months.

Near its 52-week low, Shaw is a steal at these levels.

Another stock trading well below its book value is KBR (KBR). KBR currently has a market cap of $4.03 billion, with a backlog of $13.4 billion. Of its revenue, 89% is internationally based and 11% is domestically based. KBR’s backlog is broken up into six pieces: downstream, government and infrastructure, services, technology, upstream and ventures.

The downstream unit has a backlog of just under $300 million, mostly focused on various downstream projects, such as refining. Most of this segment is based on emerging markets.

Government and infrastructure has a backlog of $5 billion, with vast diversification among various defense services and nondefense branches of the U.S. government

The services business unit backlog ballooned from the first quarter of 2007 to first quarter of 2008, up a whopping 208%. Mostly driven from demand from the Canadian oil sands, this is an indirect play on the Canadian oil sands.

Technology is the smallest backlog of the portfolio, coming in at around $110 million. This is mostly leveraged to intellectual property assets and is focused on capitalizing on future licensing opportunities.

The upstream side of the business accounts for the largest portion of the backlog portfolio, coming in at a $6.5 billion vs. first-quarter 2007's $4 billion. This portion is directly leveraged to the price of oil and natural gas and exploration thereof.

The Ventures backlog accounts for $700 million, up 17% since the first quarter of 2007. Here KBR makes equity investments on a stand-alone basis.

Near its 52-week low, KBR’s total backlog has grown from $10.7 billion in first-quarter 2007 to $13.4 billion in first-quarter 2008, up 25% year over year. During the same time, recurring business income has grown 30%, which means KBR’s customers love their service.

KBR has zero debt and $1.5 billion in cash sitting on the books, which is shocking, given how capital intensive the engineering business is by nature.

KBR is another insanely cheap stock.

For more names of companies that are trading below their backlog, including Perini (PCR) and Foster Wheeler (FWLT), please check out the Stocks Trading Well Below Their Current Backlog Orders portfolio at Stockpickr.com.

Posted on Sept. 3, 2008