Fluor Disappoints

| About: Fluor Corporation (FLR)

Summary

Fluor reported fourth-quarter adjusted EPS of $0.68, well below the consensus estimates of $0.93.

Despite Q4 headwinds, management reiterated 2016 EPS guidance.

At the current juncture, Fluor has limited room for upside given the more muted awards outlook in oil and gas.

What Happened

Fluor Corporation (NYSE:FLR) shares fell nearly 2.5% on Friday after the engineering and construction company announced fourth-quarter results that were below consensus estimates. Fluor reported Q4 EPS from continuing operations of $0.68, missing the Street consensus of $0.93 mainly due to a charge on a gas-fired power project and a higher-than-expected tax rate. Revenue decreased 20% year-over-year to $4.37 billion, 6% below the consensus. New awards, at $7.8 billion, were strong on the back of the previously announced $5.0 billion Westinghouse nuclear award. Looking forward, Fluor maintained its 2016 EPS guidance of $3.50-$4.00 but provided end-market commentary, highlighting continued uncertainty in award timing and customer spending patterns and increasing price pressure.

In addition, Fluor signed an agreement with private equity firm Arle Capital Partners to acquire full ownership of Stork Holding, a provider of maintenance, modification and asset integrity services associated with large existing industrial facilities in oil and gas, chemicals, petrochemicals, industrial, and power markets in Europe, the Americas, and the Middle East, and Asia-Pacific regions. Overall, the acquisition news is collectively viewed as positively as it helps to mitigate the commodity sensitivity and inherent cyclicality in Fluor's more project-drive engineering and construction businesses.

Bullish Takeaways:

  • New awards in the quarter totaled $7.8 billion, Fluor's highest quarterly order intake of the year, highlighted by $5.0 billion in awards from Westinghouse for the management of its nuclear power projects in the Southeast U.S. As a result, Fluor's backlog increased 7% sequentially, to $44.7 billion, which is a record for the company and up from $42.5 billion at YE14.
  • Oil and gas segment profit margin was 7.8% in the quarter and 7.6% for the full year, well ahead of 7.3% in 4Q14 and 5.9% in 2014.
  • Management reiterated 2016 EPS guidance of $3.50-$4.00, despite Q4 headwinds. Management expects EPS to improve throughout the year.
  • FLR's generally strong balance sheet and solid cash flow should continue to support an active capital allocation program that includes dividends and share repurchases. However, in the near term, the company has cash needs for the acquisition of Stork Holdings, certain payments for JVs, and ongoing investment in its NuScale nuclear development project.

Bearish Takeaways:

  • While the inclusion of the nuclear contracts will drive significant power segment revenue and profit growth in 2016, Fluor continues to face a difficult end-market environment entering 2016. Broadly speaking, award prospects continue to be challenged by reduced customer spending and a more deliberate pace of expenditures, which have been influenced by global macroeconomic concerns, lower commodity prices, and lower near-term cash flows.

Conclusion

The main risk to FLR is that new awards and backlog decline over the coming quarters has increased to a level that will likely limit upside to the stock in the near to intermediate term. Despite certain corporate actions to enhance shareholder value (share repurchases, acquisitions, cost reductions, etc.) as well as a low valuation relative to its historical level, without backlog growth, the willingness of investors to drive the share price higher remains in doubt.

On the flip side, the Westinghouse contracts and pending Stork acquisition, which combined will provide an improved base of less cyclical revenue, should be considered as factors that could provide support to shares.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.