by Geoffrey Seiler, editor BullMarket.com
is the largest and one of the oldest publicly traded engineering and
construction companies in North America, with a current market cap north
of $8 billion.
Backlog doesn't automatically translate into
revenue as projects can be canceled or delayed, but it is a window into
an E&C company's potential. And at a record $42.5 billion in
backlog, Fluor has enormous potential.
The stock has fallen out of favor with investors, however, sliding from
$67.68 in February to current levels, in part over worries about
weakness in oil prices and the potential for sharp cuts in defense
spending in the U.S.
Its government unit principally works with
federal agencies such as the Department of Defense, Department of
Energy, Homeland Security, and the Federal Emergency Management Agency
(FEMA). Management calls them "annuity" types of business, despite all
the fretting over potential spending cuts by Washington.
recently won a 38-month extension to continue the management of the
DOE's Savannah River Nuclear Site, including the ongoing cleanup or
closure of more than 100 contaminated structures.
provides services to support the military's operations in Northern
Afghanistan and it recently won the LOGCAP contract for Africa.
On the infrastructure side, there haven't been a lot of projects it has
been interested in bidding on recently, but the company is poised to
take advantage of the thousands of aging bridges and other
infrastructure in the US.
One recent milestone was the completion
of the Greater Gabbard wind energy project off of the U.K. coastline.
This was a major, multi-year project that resulted in the installation
140 wind turbines.
The balance sheet is strong. Fluor ended the
quarter with $2.23 billion in cash at just $533 million in debt. Fluor
opportunistically added $500 million in debt at end of last year, taking
advantage of the low-rate environment to add capital or refinance
existing debt on the cheap.
Analysts are very bullish of Fluor at
present, with 19 of the 22 firms that cover the company recommending it
to clients. Their average target price is $72.50, with the most
optimistic analysts pegging the stock's potential at $83.
Fluor's 100 years of experience and the diversity of its capabilities,
this stock is on sale in our view at 11x the 2013 EPS consensus.
its February peak the stock was closer to a forward P/E of 16x; even at
that level it was below historic mid-cycle multiples that approached
Investors appear to be pricing in a much more dramatic
decline in crude oil prices than we think likely barring another
collapse in confidence such as occurred in 2008.
While there are
headwinds to be sure, such as Europe's woes and a reluctance by some
businesses to spend in advance of the U.S. election, we think Fluor has
more positive than negative indicators of future growth.
fundamental long-term trends point to an increased need for energy;
there is also a huge need for more efficient power plants, not only in
the U.S., but elsewhere in the world. Then there is the need for the
U.S. to invest in upgrading its aging infrastructure.
any fretting over defense spending cuts is misguided as Fluor's work
involves supporting troops on the ground in Afghanistan and elsewhere.
don't see that funding disappearing under any plausible scenario in the
near term. Other defense contractors have more reason to worry if the
"fiscal cliff" is breached.
Overall, the risk-reward potential
looks pretty favorable and we think investors with a long view can ease
into the name at these levels.