Fluor Corp. (FLR) reported earnings after the closing bell on Monday, and we believe the global engineering and construction company continues to offer compelling value. Estimates called for earnings per share of 91 cents, which would have been an increase over the same period a year ago where FLR made 87 cents. The company beat earnings by two cents, although revenue was just a little bit light at $5.3 billion.
There are a few reasons that we think that Fluor offers attractive value to long term investors. First, the company has shown the ability to handily beat estimates in each quarter thus far in the 21 month long recession. Part of the reason for this is many of Fluor’s projects are signed months in advance of start date. So, the backlog of business has helped to keep Fluor busy at a time where most businesses were dealing with declining revenue. With more than half of Fluor’s revenue coming from projects related to oil and gas, it is impressive to see the company continue to succeed as oil has been especially volatile over the last twelve months. The return of higher energy prices might be able to reinvigorate this side of the business, as more projects have become profitable. The bulk of the remainder of Fluor’s revenue likely comes from infrastructure projects which will likely remain a focal point of government/stimulus spending for the next few years at least.
Also, economies around the world have shown a good deal of improvement over the last few months, and this is a welcome development for Fluor. Obviously, if private companies and government entities are not spending capital in order to preserve their balance sheets, then there will be less demand for Fluor’s services. If growth can indeed return soon, then Fluor will benefit from a cyclical return to more aggressive capital spending activity.
An example of this, just today Fluor announced it had signed a contract through its Russian joint venture Sakhalin Neftegas Technology LLC to expand an onshore processing facility. Flour has booked $700 million in the first quarter of 2009, which for a company the size of Flour is a moderate size contract. Just last month, Fluor signed a $7 billion deal over 5 years with the U.S. Army to do infrastructure work on 74 operational bases in northern Afghanistan. All told, the backlog rose to $30.9 billion from $29.1 last quarter. The total backlog was 6% lower than last year, which is to be expected from cancellations in the oil and gas segment.
Fluor has done a decent job of maintaining the business even through the huge downturn in cap ex., and should stand to benefit greatly as capital spending budgets start to flow more easily. The stock has appreciated 72% since hitting its low in early March, but we still would not consider it expensive trading at 15 times expected fiscal 2009 profit. The stock looks appealing on a price-to-cash basis, currently trading 10.8x whereas historically a range of 12.2x to 23.6x has been normal over the last ten years. FLR is also attractive on a price-to-sales basis, with a current price of $57.49, FLR is a full 61% below its average price-to-sales ratio at comparable revenue levels. Given the current fundamentals we would recommending buying shares up to a price level in the high sixties.
The stock is selling off just slightly in after hours because the revenue totals didn’t match targets. We are reaffirming our Undervalued rating on FLR after today’s earnings report. Investor sentiment, as gauged by the Motley Fool’s CAPS survey, is positive on Fluor as well.
