Tuesday, November 10, 2009

Fluor (FLR) Guides Down for the Year, Investors Disappointed

Engineering / infrastructure firm Fluor (FLR) is one of those few stocks that one could purchase before heading to a remote island for a decade, arrive back in 2019.... and the company would be executing and thriving.  However, it's business - dependent on large projects - is quite lumpy from quarter to quarter, and it has been struggling of late.  You can see while the market has had an upward bias, the stock has been in a downturn for a good 2 months, signaling "those in the know" *knew* what was coming, and were exiting stage right. Which is exactly why I think a hybrid approach of technical and fundamental analysis is a bedrock for stock evaluation - in this case the technicals were telling you something was amiss.

The engineering and construction firms are definitely MID to LATE cycle, not early cycle stocks... so for companies in this sector, their time will be in the future.  Fluor and Jacobs Engineering Group (JEC) remains the cream of the crop in this group and for those with multi year time horizons probably begin to present some compelling valuations.  Some of the smaller firms in the sector might, however, be acquisition targets and present higher risk/reward opportunities.

Fluor reported last night, and disappointed with lowered guidance; a bit of a surprise because management is very good at low balling and beating i.e. playing the Wall Street game.  Frankly, I cannot remember them missing like this in the past 3 years at least.  2010 estimates for earnings are also tagged to be lower than 2009.  So the green shoots of recovery have yet to truly manifest in this group - new project awards were quite weak at $2.9 Billion versus nearly $9 Billion a year ago.  Backlog also down by nearly a quarter year over year.  Full report here... some quick observations below.

Via Reuters:
  • Fluor Corp (FLR) posted a lower quarterly profit as energy project spending slowed with the drop in oil and gas prices, and the largest publicly traded U.S. engineering company forecast weaker profits for this year and 2010.
  • Third-quarter net profit fell to $162 million, or 89 cents per share, from $182 million, or $1.00 per share, in the same quarter a year before. Revenue fell 4 percent to $5.42 billion. Analysts had expected 90 cents per share on revenue of $5.49 billion.
  • Backlog at the end of the third quarter fell to $28 billion, versus $30.9 billion three months before and down 23 percent from a year ago, the company said on Monday.  Fluor removed $1.2 billion from its backlog due to an indefinitely delayed Russian gas processing expansion. The company also took a $45 million provision due to a collection issue with the completed revamp of a paper mill.
  • Chief Executive Alan Boeckmann said spending had shifted toward the exploration and production side, both offshore and onshore, and that this area was one of its target areas for potential acquisitions, along with infrastructure businesses.  
  • "The clients' capital programs have definitely shifted away from the downstream, where it had been over the last couple of years. And so ... the prospects out there reflect that," Boeckmann told analysts on a conference call on Monday.

  • The Irving, Texas-based company trimmed its 2009 earnings forecast to $3.75 to $3.90 per share from a range of $3.80 to $4.10, which it had reaffirmed in August. 
  • The company set 2010 profit guidance at $3.20 to $3.60 per share
  • Analysts, on average, had been targeting profits of $3.85 per share for this year and $3.58 for 2010.
  • "Looking ahead to 2010, we are taking a cautious view of our markets at this time, but remain hopeful that a broader economic recovery will develop during the year," Chief Executive Alan Boeckmann said in a statement. 

One analyst view:
  • Despite the lower quarterly results, Lazard Capital Markets analyst Graham Mattison wrote that his firm continues to regard Fluor as "one of the best companies in the energy infrastructure sector, and we view the stock as a core holding.
  • "However, the earnings potential of the company's massive backlog and healthy cash balance are fairly reflected in the share price, in our opinion," he wrote. "Risks include slowing end-market demand, lumpiness of bookings and revenues given large-scale projects, as well as potential for cost overruns on projects."  (to be fair those are the same risks that exist every day of every year for this type of firm)

Fluor Corporation (NYSE: FLR - News) designs, builds and maintains many of the world's most challenging and complex projects. Through its global network of offices on six continents, the company provides comprehensive capabilities and world-class expertise in the fields of engineering, procurement, construction, commissioning, operations, maintenance and project management.

[Aug 11, 2009: Fluor - Solid as Usual]
[Feb 26, 2009: Fluor and Flowserve Continue Best of Breed Ways]
[Dec 3, 2008: Back of Envelope Look at Infrastructure Sector]
[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]

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