Take Advantage of Fluor Corp’s Transitory Issues to Invest in the Company
May 7, 2018 by InvestorDestination Team
Recently Fluor Corp (NYSE:FLR) has lowered its full-year EPS estimate from $3.1 - $3.5 to $2.1 - $2.5. The company has blamed this on challenges it is facing in developing gas-fired power projects. During the recent call, the company is trying to convince that it is an anomaly, but the investing community is wondering whether it is due to a systematic problem.
When it lowered its EPS, the stock fell by more than 22% and has hit our entry point. Now let us take a closer look at this company.
It is not the first time the company is facing challenges while developing gas-fired power projects. Even last year, the company wrote down cost overrun for these projects. The company admits that it bid aggressively for these projects and has changed the management team which was responsible for it. Additionally, in 2016, the company experienced similar challenges for an energy project called CP Chem.
A few years ago, when commodity prices declined, commodity players slashed their capital spending, and that caused a downturn for EPC players such as Fluor. During this downturn, commodity players expected EPC players to bear extra risks. So, the company might have bid aggressively and taken significant risks. The Majority of these projects are fixed price and have lower margins. So these projects have a very low margin for error.
The best way to manage a downturn is not to take extra risks, but to maintain a company’s internal bidding standards. If a company doesn’t lower its bidding standards during an industry decline, its backlogs and new orders will drop more than its peers. However, compromising on standards will not result in a long-term gain.
We would have admired the management if it didn’t lower its bidding standards during this downturn, but at least now the company is trying to rectify its problems. It is tightening its bidding standards. So, its new orders will decline, but the probability of fixed cost projects going over budget will also be lower. While we can’t predict the risks associated with its current backlog, the company has a long history of successfully executing projects and nothing indicates that company has lost that overnight. It has long-standing relationships with customers.
The company develops thousands of projects and experiencing a loss for a project or two is part of doing business rather than a systematic problem. I am sure the company has experienced cost overrun for some projects and exceeded its profit estimates for others. Unfortunately, due to the size of these projects, the cost overrun is having a material impact.
After a couple of years of tightening cap-ex spending, energy and mining players need to increase cap-ex spending, and they are doing so. The rising commodity prices are providing a tailwind for the industry. In not too distant future, there will be US infrastructure projects which will give a boost to EPC players such as Fluor.
The company has decided to exit gas-fired power projects and instead will focus on alternative and nuclear projects. It is a global company, and global solar demand is strong. It develops projects for diversified markets.
It is a decently managed company and has a strong balance sheet. It develops projects globally for diversified markets. It has long-standing relationships with customers. When this industry is facing multiyear, multi-market uptrend, make use of these transitory issues as an opportunity to invest in this company.
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