Home > Stock Analysis

Fluor Paints A Good Picture Of The Economy

Posted: Nov 13, 2009 12:18 PM by Sham Gad

Tickers in this Article: JEC, HAL, KBR, FLR

Global construction and engineering firm Fluor (NYSE:FLR) reported third-quarter earnings indicative of both a business with deep diverse business lines but exposed to all factors of the economy. Fluor designs, builds, manages and services some of the worlds most complex projects on all six continents. The company services the energy sector, the infrastructure and industrial sector, the government and the utilities industry. In short, its various business lines cast a wide net over the economy.

Get Free Stock Analysis By Email

IN PICTURES: 20 Tools For Building Up Your Portfolio

A Good Look at World Business
For the third quarter of 2009, Fluor reported revenues of $5.4 billion and net income of $162 million, compared to sales and profit of $5.7 billion and $182 million, respectively. Compared to most businesses in similar lines of work, this 4% declining in sales looks outright enviable in this economic environment. However, its important to note that most of the company's projects take years to complete, so they are - to a certain extent - immune from sudden economic shocks. Also, Fluor's customers are often large, well-capitalized energy firms, stable utilities and government entities that have more financial flexibility during tough times. It's doubtful that a major construction project initiated in 2006 would be halted today. (For more, see Economic Indicators To Know.)

However, a key barometer of future success for Fluor is the dollar value of backlog work that the company gets. That's an excellent indicator of what major businesses and government are spending and feeling about future expansions or renovations. In the third quarter, new awards totaled $2.9 billion, compared to $8.8 billion a year ago. Total backlog is $28 billion, down 23% from the year ago level. For a business that does about $21 billion in annual revenue, a continued decline in backlog makes investors wary.

Not Alone
The company is not alone. Other engineering and construction firms including KBR (NYSE:KBR), which was spun out of Haliburton (NYSE:HAL), and Jacobs Engineering (NYSE:JEC) are all experiencing a slowdown in new contract awards. One of the items that Mr. Market didn't like was the fact that 2010 net earnings per share are expected be as much at 10-15% less than 2009 figures, which suggests that businesses are still delaying maintenance and replacement capex.

Shares dropped 7% on the earnings release, but Fluor is an excellent company that should do well when business turns. In the meantime, it's an $8 billion company, with over $2 billion in net cash on the balance sheet. Book value per share also increased by 30% over the same time last year. In fact, despite the earnings reactions, the company was actually upgraded by Citigroup the following day.

The Bottom Line
For now, gone are the days of private spending that benefited Fluor so well a few years ago. Still, to a certain extent, most of Fluor's work constitutes essential aspects of its customers business operations. This company should find its way back to growth sooner rather than later. (For related reading, check out The Value Investor's Handbook.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

By Sham Gad

Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS