Fluor: Industrial Construction Firm Getting Rave Reviews

Fluor (FLR) is an engineering and construction company focused on power plants, chemical and drug factories, bridges and other big structures.  Their boilerplate description is a great recap of FLR :

Fluor Corporation (NYSE: FLR) is a global engineering and construction firm that designs and builds some of the world's most complex projects. The company creates and delivers innovative solutions for its clients in engineering, procurement, fabrication, construction, maintenance and project management on a global basis. For more than a century, Fluor has served clients in the energy, chemicals, government, industrial, infrastructure, mining and power market sectors. Headquartered in Irving, Texas, Fluor ranks 109 on the FORTUNE 500 list. With more than 40,000 employees worldwide, the company's revenue for 2013 was $27.4 billion

 Like many large project construction companies, such as Netherland-based Chicago Bridge and Iron (CBI) and London-based AMEC (AMCBF), FLR has a substantial backlog of work.  With a backlog of over $40 billion, the company has about two years of work under contract.  Below is a recap of the backlog by operating segment:

Government                $5.2 billion 13% of backlog

Power                          $1.7 billion 4%

Industrial and Infrastructure   $9.2 billion 23%

Oil and Gas                 $24.4 billion 60%

The company’s recent awards include a multi-year contract to decommission a nuclear power plant in the UK and a gas pipeline in Mexico.  One of FLR-designed and constructed complex medical projects was named the International Society for Pharmaceutical Engineering 2014 Facility of the Year for Project Execution.   As the conversion from coal-fired power generation to natural gas marches on, the construction budgets of power companies globally will continue to be strong.  However, two sectors are dragging down investor’s interest – mining and energy. 

Investors should continue to watch the spread between new awards and revenues on a quarterly basis.  For example, during the second quarter, the company booked $5.9 billion in new business while billing $5.3 in revenue, increasing the backlog by $600 million – a positive sign for future revenues.

Morningstar offers an interesting recap of FLR’s strengths and weaknesses:

Bulls Say: Much of the world's easily accessible natural resources have already been harvested, meaning future mining and extraction projects will increasingly take place in remote areas. Fewer companies can service these types of projects, which should benefit Fluor. Fluor has a solid balance sheet with plenty of cash to spare for buybacks and making strategic bolt-on acquisitions where necessary.  Major multiyear project awards will provide top-line stability over a number of years.
Bears Say:  Fixed-price contracts will become more common in the coming years. Though they can carry higher margins than cost-plus contracts, fixed-price contracts are also riskier as they put more of the burden on the contractor to control costs and manage unforeseen circumstances like poor weather.  With more than 40,000 employees around the world, rising labor costs in emerging markets could keep pressure on Fluor's margins.  Working on large projects in remote areas of the world may create a greater chance of cost overruns and geopolitical risks. 

 With the current decline in most energy related stocks, Fluor offers interesting opportunities at its current price.  Shares have dropped about 15% since the market high in Sept and are 23% below its 52-week high of last spring.  There is concern the current drop in oil prices will curtail oil and gas infrastructure projects, negatively affecting FLR and other oil and gas E&C firms.  However, with only 60% of its business in the oil and gas business, the slide in share prices has eliminated the company’s well-deserved valuation premium. 

One consideration is management’s negative Net Return on Invested Capital.  Below is the Weighted Average Cost of Capital WACC as offered by ThatsWACC.com and the three-year average Return on Invested Capital, as offered by Morningstar.  The list includes FLR, CBI and competitor Jacobs Engineering (JEC):

As shown, FLR capital costs seem to be in line with its competitors.  With the decline of CBI’s returns post-Shaw merger, the trailing twelve months ROIC for FLR and CBI are neck-in-neck at 14.2% for FLR and 13.8% for CBI.  

With a 2015 forward PE of 13 and a growth rate of 13%, the PEG ratio is 1.00, or fairly valued.  Earnings should grow from $4.02 in 2013 to $5.62 in 2016.  With a yield of 1.2%, the anticipated total annual return of 18.7% over the next 24 months will come from its share prices moving back over its previous high of $87.

Barron’s recently published an article on FLR titled “Oil Slump Makes Fluor Stock a Potential Double.  Sliding crude prices have put shares of the biggest U.S. engineer in the bargain bin.”  From their article:

Long-term Fluor shareholders have made out handsomely, with a yearly total return of 12.7% over the past decade, versus 8% for the Standard & Poor’s 500 index. However, year-to-date, Fluor has flopped, selling off 19% while the S&P 500 has gained 4%.
Earnings estimates have moved lower, but not nearly as fast as the share price. For example, back in July analysts predicted Fluor would earn $5.15 a share next year. Now they say $4.97, or 3% less. One reason forecasts have held up better than the shares is that Fluor has a $40 billion backlog of upcoming projects, enough to supply it with 21 quarters worth of revenue.
About 80% of the backlog consists of “cost-plus” jobs, where visibility on profits is high, according to investment bank D.A. Davidson. It initiated coverage of Fluor shares at the beginning of this month with a Buy recommendation and price targets of $85 over the next 12 to 18 months, and $150 over five years. The nearer-term target is about 30% above Fluor’s recent price of just below $65. The longer-term one is 130% higher.

The article can be found here:


Investors looking for a large-cap growth company with exposure to expanding oil and gas infrastructure should review Fluor as a core holding in the energy sector.  The current market weakness should provide a good entry point for new positions. 

Disclosure: Long FLR.  FLR is  followed by Guiding Mast Investments newsletter.  Thanks for reading, George Fisher