Fluor-ishing in a Recession

RecessionFluor Corp. (FLR) is a wonderfully diverse company that has maintained its strength as the economy has worsened over the past year. When Fluor reported third quarter earnings last month, it beat consensus estimates for the fourth straight quarter, this time by 11%. Revenues were $5.67 billion which narrowly missed estimates of $5.8 billion but sales grew 38.4% over last year. In addition, the company reportedrecords in new business booking and its highest-ever backlog of business, which prompted the company to raise full year estimates to a range of $3.70-$3.80 from previous estimate of $3.52. It seems that no one told Fluor that we are in the midst of a full-scale global economic slowdown.

Fluor is one of the largest publicly traded engineering, procurement, construction and maintenance services companies in the world. It has offices in 25 countries and six continents around the globe. The company is a global force in the fields of oil and gas, chemicals, pharmaceuticals, nuclear, alternative energy, infrastructure and government projects. Essentially, the company is a premier provider of engineering services and more than half the Fluor’s revenue (57% in 2007) comes from overseas. The company’s international sales had been helped by a weak dollar since 2006, but the dollar’s recent appreciation relative to most other global currencies could be of some concern going forward.

FluorIn the interest of brevity, I will not go into every segment of Fluor’s business, but would be remiss if I did not cover the energy and infrastructure components. Fluor derives half of its business from both upstream and downstream oil and gas services. Interestingly, the sharp decline in crude oil prices has not greatly affected Fluor’s backlog of business. This is because Fluor’s clients have long term expectations for a higher price of oil instead of today’s depressed price. According to Fluor CEO Alan Boeckmann, these capital projects are based on long term assumptions for crude to realize an average of $50 or even $60 per barrel. So, the possibility exists that if the price of crude were to continue to fall sharply, Fluor’s upstream clients might have to pull back on capital expenditures; however, this possibility is greatly diminished by the long time horizon of these projects.

Fluor is also actively pursuing projects in alternative energy, likely to be a focal point of the incoming Obama administration. It has been awarded a contract for the two largest polysilicon plant projects in the world from LDK Solar (LDK) in Xinyu City, Jiangxi, People’s Republic of China (link). In addition to solar energy, the company also has been contracted to build the largest offshore wind farm from Scottish and Southern Energy [SSE] (link).

I am also very positive on Fluor’s infrastructure division and its potential for growth under the Obama administration. I wrote about Vulcan Materials (VMC) (original here) recently as another company that would benefit from Obama’s pledged infrastructure improvements, and interestingly, just yesterday Jim Cramer made that company one of his favorite Obama plays as well (Cramer). Well, the President elect has made promises to make infrastructure projects a top priority of his administration starting on day one, and Speaker Pelosi is already drafting the required legislation (possibly $500 billion) in preparation to hit the ground running. Fluor could be seeing an increase in this business segment which in 2007 accounted for 20% of revenues.

Ockham rates Fluor Corp. as Undervalued since the stock has suffered a more than 50% decline over the last six months. It is clear that many of the largest segments of Fluor’s business have not been significantly impaired by the global recession, which is quite a feat considering the extremely difficult global economic environment. Also there could be significant gains in store for the company as a result of President elect Obama’s aforementioned policies.

Over the last ten years, Fluor stock has traded at a Price-to-Cash Flow level in the range of 11.4x to 22.4x but the stock currently trades at just 9.6x. Even more striking, the normal historical range of Price-to-Sales has been .3x to .57x but FLR is currently trading at only .16x, which is almost half the low end of this range. Were these valuation metrics to come into line with even the lower end of the historical range, we would expect to see the stock price in the low $60’s. The world will continue to need engineers and Fluor appears relatively resistant to downturns and has great potential in a growing global economy. It is rare to find an undervalued stock in which the underlying company continues to grow earnings, raise guidance and post a record backlog of business.

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