Fluor Fits Into Industrial Growth

The latest ISM report forecasted manufacturing CAPEX for 2022 to increase 7.7% following a 12.1% decrease in 2021.

Given supply chain congestion and strong demand, companies need to expand domestic capacity quickly.

As a leader in engineering and construction services, we expect Fluor (FLR) to benefit from this trend.

The 4th highest engineering and construction stock search by financial pros this month according to our data, we believe the broader community has yet to uncover this gem.

Part of that stems from a complex picture painted by the company’s financials.

So, let us unpack what’s out there and show you what’s really going on.

Fluor’s Business

In a nutshell, Fluor is who you call when you want to run construction, set up and run operations, or establish procurement in various sectors.

Their business hasthree segments:

• Energy Solutions (44% of revenues) 
• Urban Solutions (32.7% of revenues)
• Mission Solutions (23.3% of revenues)

Prior to 2021, the company hadsix segments: energy & chemicals (33.6%), mining & industrial (26.5%), infrastructure & power (10.2%), government (18.6%), diversified services (10.4%), and other (0.7%).

Currently, the company is focused on their “Building a Better Future”, which outlined the following four objectives:

Lastly, we want to note that NuScale, a leading provider of small modular nuclear reactor tech, is going public via a SPAC. Fluor owns 80% of this company. The company’s stake will decline to 60%.

Financials

As we alluded to earlier, Fluor’s financial picture is anything but clean.

Here are some key items to note:

• In 2019 and 2020, Fluor took $532 & $305.6 million in impairment, restructuring, and exit costs.
• The company ate $137.9 million in a pension settlement in 2019
• Energy & chemicals took a $260 million in 2019 for cost growth on an offshore project.
• In that same year, infrastructure & power took a $135 million charge for a settlement with clients plus another $133 million for late engineering changes. 

Management acknowledged these problems as it rolled out their current strategic plan. As such, the company plans to work towards better contracts while diversifying their revenues to have a greater balance outside of energy.

That said, we want to point out that on an operational basis, the company only saw negative gross margins and operating income in 2019.

Lastly, we want to note the company’s strong balance sheet with $2.2 billion in cash against $1.2 billion in long-term debt.

Valuation

Given the financials, valuation is a bit difficult under normal metrics. However, we can still glean a few items.

As the random charges clear themselves, we come up with a forward non-GAAP price-to-earnings ratio of 26.88x.

Additionally, the company forecasted adjusted EPS of $0.85-$1.00 per share, or P/E ratio around 25x-31x.

That’s not great. But, it likely still includes cost overruns that won’t last much longer.

What we do like is the incredibly cheap price-to-sales ratio. That gives us hope that when Fluor gets their financial house in order, shares could see some serious gains.

Now, the current price-to-forward cash flow sits at 51.86x. We expect Fluor to get back to the point where operating cash flow is a minimum of 1.5% of revenue and eventually closer to 4.5% of revenue based on the company’s history.

That would put our expected price-to-operating-cash flow ratio somewhere between 5.6x-17.0x.

Our Opinion – 8/10

We feel that there’s much more here than meets the eye.

Fluor has a long way to go. However, shares are trading at a heck of a discount.

With significant upside potential, we prefer to pick up the stock closer to $16-$17.