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The Economic Depression May Actually Save Fluor

Jun. 02, 2020 4:36 PM ETFluor Corporation (FLR)GVA, J, MDRIQ11 Comments
Harrison Schwartz profile picture
Harrison Schwartz
14.77K Followers

Summary

  • Fluor corporation and other construction companies are struggling with negative cash-flow due to cost overruns and overly optimistic contract bidding.
  • Because most construction firms are struggling with negative cash flow today, they are likely to bid higher on new contracts tomorrow.
  • Even if COVID causes Fluor's revenue to decline 50%, if its margins return to past levels, it would have a low hypothetical "P/E" today of 5-6X.
  • The extreme rise in global unemployment and decline in energy costs is likely to lower Fluor's production costs.
  • Fluor appears to have adequate working capital and cash to make it through a lasting period of negative cash-flow.
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(Pexels)

Engineering and construction companies have been in deep water for the past few years. This includes the likes of Fluor Corporation (NYSE:FLR), McDermott (OTCPK:MDRIQ)(bankrupt), Granite Construction (GVA), and Jacobs Engineering (J). While a few of these companies have remained profitable, many are taking significant losses due to aggressive bidding on large infrastructure projects. This led to the bankruptcy of McDermott, and many fear that it will soon lead to the bankruptcy of Flour Corporation which had a $5.29 EPS loss on its last quarterly report.

In fact, Fluor's charges were so large that the DOJ recently subpoenaed the company for documents relating to an SEC investigation regarding its extreme 2019 charges. As you can see below, the company is not alone in its steady decline lower:

Clearly, many large construction companies are in a state of secular decline. It is not that demand for infrastructure projects are low, demand is actually decent (as seen in revenue), only that companies appear to be underestimating costs. Construction is a thin margin business, so a small mistake can easily bankrupt a firm.

Still, when bankruptcy risk is high, the value opportunity is often higher. Let's take a closer look at the E&C business with the aim to determine whether or not Fluor can and will recover from its current hole.

Long-Term Trends in Infrastructural Construction

Revenue per share gives us a broad view of the secular trends facing a business. If it is increasing, it is likely that business activity is increasing and vice versa.

As you can see below, RPS increased dramatically for Fluor and its peers from 2000 to 2010 during a major global construction boom. With the recession, RPS declined due to a decline in private sector contracts but subsequently rose due in part to a rise in public

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This article was written by

Harrison Schwartz profile picture
14.77K Followers
Harrison is a financial analyst who has been writing on Seeking Alpha since 2018 and has closely followed the market for over a decade. He has professional experience in the private equity, real estate, and economic research industry. Harrison also has an academic background in financial econometrics, economic forecasting, and global monetary economics.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FLR over 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (11)

c
I think this article fails to incorporate that massive changes to bidding DD (the primary source of the problem) have been completely overhauled in the last year. I think FLR, while still not out the woods yet, is far leaner and healthier now than its financials show. It’s gonna take a year or three to absorb the cost overruns and close out the bad projects.
ronald61239 profile picture
It appears to me FLR will be suspending the div. this Qt.
The Hanford contract is being protested. Should they lose it, would be very bad news f the Co.

I doubt U have looked at Jacobs. U would have never included it in this article.
Cambridge STR profile picture
The global economy can not rebound without FLR rebounding.
I
What many fail to recognize is that the previous leader and his team de-emphasized Services group which held highest margins at the lowest risk. Instead they doubled down on high risk energy and did terrible acquisitions...so a negative triple whammy for the company.
Stockpicker1967 profile picture
O how the mighty have fallen.
P
Cost of labor is secondary to labor productivity in it’s impact on margins.
S
Hey, are you guys still bearish ?
c
So do you think it's a decent buy TODAY? People that were smart/lucky enough to buy on 03/18 made a handsome profit.. What about the SEC investigation? Also, what does it tell us about FLR management that they bid so much business so low to result in negative cashflow? I am a bit on the fence on this one.. High risk for sure.
Agree, every subcontractor i have ever delt with has misjudged costs but im surprised to see it in a company of this size. Perhaps its inherent to contractors yet home builders seem to do it well. The catalyst of infrastructure bill would have to outweigh the potential 50% loss from oil and mining and thats a lot.
c
I think infrastructure could be several times larger than oil and mining combined.. or at least it should judging from the state of our infrastructure! And it would drive investment in mining and oil too perhaps.
B
Any thoughts on GVA?
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