Aug 17, 2017 by InvestorDestination Team
Fluor Corporation (NYSE:FLR) is a diversified, well-managed EPC player. It offers EPC services to a variety of markets such as oil & gas, mining, infrastructure, industrial, life sciences, government, etc. It also provides maintenance services. It generates the majority of its revenue from Energy, Mining, Chemical, Industrial, and infrastructure. It offers services around the globe; it generates approximately 50% of its sales from outside the US.
EPC is a highly competitive, low margin business. The ability to efficiently execute projects is essential for the success. The company has been in the business for a long time, and it has a proven record of successfully executing. However, that doesn’t imply that the company will never miss project schedules or experience budget overruns. For example, last year the company cut its EPS estimate as one of its fixed cost projects – CPChem had experienced schedule delays that resulted in cost overruns. Similarly, last quarter the company experienced cost overruns in couple of gas fire projects.
The severe downturn in oil and other commodity markets has forced commodity players to cut capital spending. While there is some uptick in mining activities, the energy market is still lumpy, and the market is expecting low oil prices to persist for a longer period. Energy companies have readjusted their business model, and now they are expecting contractors to bear more risks. So, for the EPC projects the competition has intensified, and projects margins are under pressure. In the recent quarter, the company has experienced historic low levels of new orders in the energy business. So, investors are worried about this challenging environment to persist for some time to come. Apart from that, recently the company has experienced loss in a couple of gas fired power projects and it is evaluating that business segment. EPC is a low margin business, and margin for error is low. This has spooked investors and now they are concerned about its ability to execute.
EPC is a cyclical business, so there will be an eventual recovery. Apart from that, economic growth triggers EPC activities and EPC is essential for economic growth. The company is diversified in end markets it serves as well as geographically. Currently there is an uptick in mining and infrastructure spending. While it is bit hard to predict the timing, Congress will pass an infrastructure spending bill to upgrade the aging US infrastructure. Capital investments are essential for energy business. So, there will be an eventual uptick in capital spending in that market. Many industry experts are predicting the energy market investments to pick up in 2018 and 2019. During this downturn, the company is improving its efficiency and staying competitive.
Before the world decides to stop producing and using fossil fuel cars, the production of alternative energy such as solar has to be increased and new infrastructure to refuel the cars has to be built.
While couple of its projects experienced weather related delays and ended up in loss, overall the company has a relatively high success rate. Apart from that ,only around 25 – 30% of its projects are fixed cost. The low new order indicates that the company is not compromising on project quality and bidding aggressively. It has managed downturns in the past. It is a stable company and uses a disciplined approach.
It is a well managed company with a strong balance sheet. It prudently manages capital, generates strong cash flow, pays dividends and periodically repurchases shares.
The company has a strong balance sheet and diversified business, so it will weather the downturn. It is a relatively large player with a strong backlog. It uses a disciplined approach which is essential to be successful in a cyclical business. Even during this down turn it is generating positive free cash flow and paying dividend. So, it is worth considering for the long term.
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