14 BARRON’S February 22, 2021
about 20% of its order backlog. As
that revenue rolls in, it could help
Fluor hit its target of $3 to $3.50 in
earnings per share that year, up from
an estimated $1.15 this year.
Investors are skeptical of Fluor
hitting that target. That could provide
an opportunity in the stock. Indeed,
some analysts see the shares, at a re-
cent $16.50, rising 80% over the next
year as the company restructures un-
der a new CEO, and revenues get a lift
from stimulus spending in the U.S.
and a broader industrial recovery.
“It isn’t a short-term trade,” says
Vertical Research Partners analyst
Michael Dudas, who recently up-
graded the stock to a Buy, with a $
target. “It’s a good combination of cy-
clical and secular tailwinds and self-
help opportunities.”
Fluor’s new CEO, David Constable,
took over in January and is pivoting the
firm’s focus. The idea is to reduce reli-
ance on the energy sector, emphasizing
growth markets such as mining, petro-
chemicals, transportation infrastruc-
ture, and government services. Fluor,
with a market value of $2.5 billion, also
does advanced manufacturing for data
centers and electronics plants. It’s
planning to generate more consistent
cash flows and operating margins un-
der new contracting procedures. And
it’s aiming to pare debt and sell non-
core businesses.
Another lift could be coming from
Washington. A major infrastructure
bill, while not imminent, would be a
win for the engineering sector. Even if
it doesn’t pass, stimulus spending for
roads, bridges, and other infrastructure
could rise under Biden. Fluor is active
in transportation projects; it has won
bids for nine in its home state of Texas
since 2017, including a recent $677 mil-
lion joint venture around Austin.
The market isn’t giving Fluor much
credit for its turnaround plan. The
stock slid nearly 7% the day after Fluor
presented its strategic update in late
January. Fluor executives were vague
when pressed by analysts on how they
would achieve $3 in EPS. “If it was seen
as attainable, the stock would have
responded more favorably,” says Baird
analyst Andrew Wittmann, who has a
Neutral rating on the shares.
Fluor is trying to regain its footing
after a number of blunders that cost it
credibility. The company for years
relied on fixed-price contracts for
large projects, absorbing cost over-
runs. Fluor booked charges and im-
pairments of $1.1 billion in 2019 and
an additional $416 million through the
first nine months of 2020, mainly re-
lated to cost overruns. Fluor also
made some ill-timed acquisitions, in-
cluding an energy maintenance-ser-
vices company that it is now selling.
Fluor has had accounting issues and
disclosed a Securities and Exchange
Commission probe of its accounting
last year. And Constable is the com-
pany’s third CEO in two years.
Fluor declined requests for an inter-
view.
A turnaround appears under way.
The company said in January that it’s
moving away from fixed-price contracts,
aiming to cut them from 47% of projects
this year to 25% by 2024, making for
more predictable cash flows and poten-
tially higher margins. Fluor completed
an internal accounting probe last year,
restating financial results and saying it
would fix deficiencies, though the SEC
investigation is ongoing.
Fluor Could Flourish
As a Turnaround Play
The engineering firm is pressing into growth businesses and cleaning up
past problems. It could be a beneficiary of U.S. infrastructure spending.
D
rive 1,000 miles north of
Seattle and you’ll reach a
remote village on the
coast of British Columbia.
The town of Kitimat isn’t
a tourist mecca, but it’s
bustling with industrial
activity. A massive natural-gas plant
and export terminal is under con-
struction—supported by new roads,
utilities, pipelines, and other infra-
structure. The $32 billion project, un-
der way since 2018, is the largest en-
ergy development in Canadian history.
The project could lift earnings for
Fluor(ticker: FLR), an American en-
gineering and construction company
that has a leading role in it. Construc-
tion is 35% complete and, after a delay
from Covid-19, on track to be com-
pleted by 2024. The project is worth
$5.5 billion in revenue to the firm,
By DAREN FONDA
F
luor is seeking growth in areas
such as mining for copper and
other raw materials for which
demand is rising. The company
runs a global mining practice for clients
such as BHP. Copper prices soared in
2020 and are expected to stay elevated.
Capex in global mining is on a multi-
year downtrend. But copper supply is
expected to fall short of demand as elec-
tric-vehicle production ramps up, spur-
ring miners to spend more on expan-
sion projects over the next few years.
“There isn’t much going on now, but
there’s optimism that mining compa-
nies are dusting off projects and talk-
ing to engineering companies to re-
scope projects in anticipation of supply
deficits,” says Mike Sinden, director of
metals and mining research at consul-
tancy WoodMackenzie.
Fluor’s revenue and per-share prof-
its aren’t expected to increase much
this year. Its project backlog slipped
from $28.4 billion in 2019 to $27.
billion this year, and it’s likely to stay
flat near term, according to Dudas.
But he sees it ramping up to $30.
billion in 2022 as the firm wins proj-
ects in a recovery scenario, driven by
increased activity in mining, petro-
chemicals, and government work.
The shares trade at 15 times earn-
ings for 2021, below their average for-
ward multiple of 17 over the past five
years. Industrials like Fluor tend to
re-rate higher at the start of a com-
modities cycle, however, as energy and
mining projects that were deferred in
a downturn get approved with rising
prices. The company has also taken
steps to reduce operating risk, poten-
tially leading to a higher multiple.
Indeed, Fluor is now selling non-
core assets and plans to cut its debt
load by $300 million to $500 million
over the next couple of years. That
should lift the equity value in its capi-
tal structure, while reducing interest
expense. Its cash position looks
healthy with an estimated $2 billion
on its balance sheet this year, provid-
ing enough working capital to win
large projects.
What is it all worth? Dudas arrives
at a $30 target, with a multiple of 12
times 2024 earnings of $3.25 a share.
That would put the stock at $40. He
expects the stock to reach the low
$30s over the next 12 to 18 months as
Fluor inches toward its 2024 EPS
target. “It’s a show-me story,” he says.
“But if they can avoid the sins of the
past, the market will reward them
appropriately.”B Illustration by Curt Merlo
’18 ’19 ’20 ’02040$FLR • NYSE
Source: FactSet