Fluor Corporation (NYSE:FLR) is a professional services company. The Company provides engineering, procurement, construction, fabrication and modularization, commissioning and maintenance, as well as project management services.
It operates in five segments: Oil & Gas, Industrial & Infrastructure, Government, Global Services and Power. Through its Oil & Gas segment, Fluor serves the oil and gas production, processing, and chemical and petrochemical industries.
In the past 12 months Fluor’s share price has dropped by over 24%, something we love to see as contrarian investors. Back in November 2014 you could have bought Fluor for $69, today its share price sits around $50.
Here at The Acquirer’s Multiple we like to keep things simple, so here’s 11 reasons why I think you should add Fluor to your portfolio:
1.High earnings yield
Fluor has a current Magic Formula earnings yield of 16.4%, based on current operating earnings of $1.026 billion divided by its enterprise valuation of $6.247 billion.
2.Record EBIT margins
At the end of 2014, Fluor managed record EBIT margins despite declining revenues, 2014 EBIT was (1.23 billion) on revenue of (21.5 billion) compared to 2013 EBIT of (1.20 billion) on revenue of (27.4 billion).
3.Loads of cash and low debt
Fluor currently has just over $2.3 billion in cash and short term investments sitting on its balance sheet, compared to its debt of just $1.0 billion.
This means Fluor has a negative debt to equity ratio of -40%.
This is calculated as debt minus cash and short term investments, divided by total equity.
4.Positive cash flow funding surplus
This is one of my favorite metrics regarding cash flow.
I call it ‘cash flow funding surplus’. Put simply it means ‘cash flow from operations’ ($642 million) minus ‘cash flow from investing’ ($199 million) minus dividends paid ($126 million) minus other financing cash flows ($156 million) minus foreign exchange effects ($67 million),
After all of that, Fluor still had a positive cash flow funding surplus of $93 million.
A cash flow funding ‘surplus’ means a company is not required to borrow money or raise equity to cover any of its actual cash commitments.
A cash flow funding ‘gap’ means a company is required to borrow money or raise equity to cover some of its actual cash commitments.
5. High ROE
Fluor’s ROE has continued to be around 20% since the end of 2014. The company is now generating higher returns on its equity despite its negative growth in revenues.
6.Commitment to share buy back program
Fluor’s cash-rich balance sheet remains a competitive strength. It ended the September quarter with cash and securities of $2.3 billion versus $1.0 billion in gross debt. Share repurchases total $360 million year to date and $855 million over the past year. Fluor expects to complete its $1.0 billion buyback program by year-end.
7. Strategic Alliances & Innovative Design
Fluor-led consortia are building the lion’s share of new ethylene crackers in the U.S. Gulf, which will pay ongoing dividends as cheap and plentiful natural gas spurs successive rounds of petrochemical development.
Fluor’s new joint venture with China’s CNOOC is a strategic alliance that represents a step change in its cost-advantaged global fabrication and modular construction capabilities.
Fluor’s Nu-Scale modular nuclear power plant design represents a novel concept with intriguing long-term growth potential.
8. Management
I enjoyed reading the transcript of Fluor’s Q3 2015 conference call. I believe David Seaton, Fluor Chairman & CEO, was very frank about his Company’s position.
“Since our last call, the global economy continues to be sluggish and commodity prices remain depressed. While commodity prices are showing signs of stability, there does not appear to be any near-term catalyst to drive prices up to where they were just a year-and-a-half-ago.
Lower commodity prices that impact our customers’ cash flow, and therefore, their ability to fund projects at the same pace. Nonetheless, we do expect customers to move forward with high-quality or otherwise necessary projects, especially those replacing depleting or deteriorating assets.
For example, oil and gas customers need to add production to replace their declining production base, as well as to meet the new regulatory demands.
Utility customers need to build new power plants to replace retiring generation capacity.
Infrastructure customers need to build new roads and replacing aging infrastructure. And the one area which we think is the most challenge to move forward at a rapid pace is LNG, where the spread between gas and other energy sources has narrowed significantly and there is a lot of new supply coming online.
Things are never as bad as the media would suggest nor as good as we would hope. Our focus is on the things we can control”.
Gotta love that sort of honesty!
9.Competitive Advantage
Global Services is Fluor’s in-house unit which provides a wide array of solutions to support projects across Fluor groups all over the world. Capabilities within Global Services include site equipment and tool services, industrial fleet services, temporary staffing services, fabrication, construction and modularization services and supply chain solutions.
Global services effectively serves as a source of backup labor and expertise to a project’s main subcontractors. Labor shortages have been a limiting factor at energy and petchem projects in North America and elsewhere. I believe this gives Fluor a strategic competitive advantage.
10.Growing Project Backlog
Fluor’s project backlog is meaningfully larger, both in absolute terms and relative to annual revenue, than other large publicly traded competitors. For example, its $41.6 billion backlog at June 30 represents 1.9 times its fiscal 2014 revenue of $21.5 billion. This compares with a backlog of $18.8 billion (1.5 times 2014 revenue) for Jacobs Engineering and GBP 6.6 billion (1.7 times 2014 revenue) for AMEC Foster Wheeler.
11.Valuation
Ok, now lets take a look at some key valuation metrics for Fluor.
Magic Formula Earnings Yield – 16.4%
Enterprise Multiple – 4.63
P/E – Price to Earnings – 10.73
P/B – Price to Book Value – 2.28
P/S – Price to Sales 0.38
So, there’s 11 good reasons to add Fluor Corporation to your value portfolio at a cheap price.
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