Fluor: 'Enormous potential'

by Geoffrey Seiler, editor BullMarket.com

Texas-based Fluor (FLR) 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.

Fluor 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.

It also 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.

Given 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.

At 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 19x.

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.

The 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.

Finally, any fretting over defense spending cuts is misguided as Fluor's work involves supporting troops on the ground in Afghanistan and elsewhere.

We 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.

Learn more about this financial newsletter at Geoffrey Seiler's BullMarket.com.

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