Thursday, February 26, 2009

Flowserve (FLS) and Fluor (FLR) Continue Best of Breed Ways

We remain in a market where fundamentals seem to matter very little, and student body trading ("everyone in!" everyone out!") is dominant, but Fluor (FLR) and Flowserve (FLS) continue to be impressive in their respective niches.

First, Fluor (FLR) the largest "global infrastructure/engineering" firm out there - unlike a lot of peers who have been decimated on earnings of late (Foster Wheeler, Chicago Bridge & Iron) Fluor seems to be outperforming - although their business is not immune; their largest segment is "Oil & Gas". We deemed Fluor to be one of the premium franchises the last time we looked at the sector [Dec 3, 2008: Back of Envelope Look at Infrastructure] however after the Obama infrastructure hype run in December through mid January, the sector has weakened considerably. With all that said, the market is not at a moment where it differentiates much among franchises, as the chart shows - to HAL9000 (the quant fund computers) every stock in a sector is the same.

Full earnings report here. They reiterated guidance but with the global economy headed the way it is, I would expect them to most likely have to drop expectations a bit later in the year - I doubt they exist in a completely different parallel universe to their peers. I also would not be surprised to see consolidation in this sector - stock prices have fallen so dramatically and engineering talent is at a premium.
  • Engineering and construction contractor Fluor Corp. said on Wednesday its fourth-quarter profit fell 27 percent compared with a year-earlier quarter inflated by a tax benefit. But its operating profit grew on growth in its oil and gas segment, and the results beat analyst expectations.
  • The company reported net income of $190.1 million, or $1.04 per share, down from $259.5 million, or $1.41 per share, during the same period last year. for the quarter ended Dec. 31 was $6.07 billion, Revenueup 29 percent from $4.71 billion during the same period last year. Fluor said that its fourth-quarter operating profit rose 30 percent to $323 million.
  • Analysts surveyed by Thomson Reuters were expecting a profit of 92 cents per share on revenue of $5.81 billion.
  • New contract awards for the quarter dropped 34 percent to $4.2 billion because of a falloff in its Oil & Gas and Industrial & Infrastructure segments. The company said it is seeing evidence of a slowdown in some projects, but it said the impact on its backlog has been "relatively minor." (backlog is key in this sector)
  • "The gloom and doom that's out there is a general prediction. We're not seeing it specifically in our business," Chief Executive Alan Boeckmann said. "We have had some cancellations and delays, but they have not been major, and we have had some very nice surprises."
  • While giving no detail, he said a few "very significant" projects timed for the second quarter of 2009, if awarded to Fluor, could help maintain its backlog by the end of the year at about its end-2008 level of $33.2 billion. "The number will start with a three, I believe," Boeckmann told analysts on a conference call.
  • Despite increased pressure on prices, Boeckmann said he does not anticipate significant margin erosion in its backlog. New awards in the fourth quarter included a petrochemical expansion project in China and a refinery conversion project in Portugal [ID:n18377365], as well as some U.S. refinery work.
  • It left its 2009 guidance unchanged at $3.90 to $4.20 per share. Analysts were expecting a 2009 profit of $3.73 a share on revenue of $23.53 billion.
[Aug 12, 2008: Fluor to Hedge Fund Computers: The World Does not End at $110 Oil. Or $80. Or $50]
[Aug 11, 2008: Global Infrastructure Night in Earnings]
[May 16, 2008: Fluor as a Wind Play? $1.8 Billion Says Yes]
[Jul 9, 2008: Fluor vs Perini - a Rising Tide does not lift all Boats]
[Feb 28, 2008: Fluor with Great Report and Boosts Guidance]


Onto Flowserve (FLS) which can be best described as a jack of all trades in the water infrastructure world. Another excellent leadership firm which the market has simply dismissed with a backhand to the face. [Oct 29, 2008: Flowserve Impressive Again] [Jul 31, 2008: Flowserve Mighty Impressive Earnings] We "escaped" this position in early September north of $100 - how the mighty have fallen.

This shows again - fundamentals and homework simply mean nothing in our current era; you can be completely correct on a stock's backstory but lose half your money. (or more) The stock is up a mighty 15% today but as of yesterday you were at lows for year 2009. Growth has slowed but in this environment any growth is a good thing. Latest earnings here
  • Industrial pump maker Flowserve Corp (FLS) posted a higher fourth-quarter profit, helped by increased sales in its flow pump and flow control businesses. For the quarter ended Dec 31, the maker of fluid handling equipment, posted net income of $114.4 million, or $2.03 a share, compared with $95.9 million, or $1.67 a share a year ago. Sales grew 5 percent to $1.2 billion.
  • Sales at its pump division grew almost 4 percent to $681 million, while flow control division sales grew 10 percent to $346 million.
  • Backlogs as of Dec 31, were up 24 percent to $2.83 billion. However, quarterly bookings fell 8 percent to $1.02 billion.
  • Flowserve also reaffirmed its 2009 profit outlook of $6.75 to $7.50 a share, which includes a charge of about 50 cents a share in realignment costs.
At $7 EPS for 2009 (if they hit it) the stock is about 7x forward earnings - again a premium global franchise. Flowserve stock is "multiple compression 101".

Once the globe returns to some semblance of growth (not anytime soon unless Kool Aid is your drink of choice) these should be among the stocks that lead the charge. For now we'll watch from afar...

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