Morningstar | After Taking a Fresh Look at Fluor, We Lower FVE to $46 and Moat Rating to None
After taking a fresh look at Fluor, we lower our moat rating to no moat from narrow, consistent with other engineering & construction, or E&C, firms under our coverage. Furthermore, we lower our fair value estimate to $46 from $50, primarily as a result of our revised moat rating and a more conservative 3.8% midcycle operating margin assumption (versus 4.5% previously). Despite lowering our moat rating, we still view Fluor as a best-in-class E&C firm.Fluor generated impressive ROICs, averaging roughly 25% from 2006 and 2015, more than twice our estimated cost of capital for the firm and comfortably above the ROICs of other E&C firms under our coverage during the same period. Nevertheless, we believe that Fluor benefited from strong tailwinds during that decade, including high oil prices, elevated capital expenditures in the mining sector, and China’s infrastructure boom. Over the last three years, ROICs have dropped to low teens. Given Morningstar’s below-consensus outlook for mining capital expenditures and infrastructure spending in China, as well as our $55/bbl midcycle West Texas Intermediate estimate, we believe it will be difficult for Fluor to replicate its impressive historical ROIC performance throughout the next decade, and we expect the firm to earn average ROICs roughly in line with its cost of capital in the long run.
That said, we still think that Fluor has solid prospects. Despite a challenging 2018, we are encouraged by the firm’s strong backlog, which stood at roughly $40 billion at the end of 2018 (versus $30 billion at the end of 2017). We expect Fluor to continue to capitalize on opportunities in refining, LNG, petrochemicals, and (to a lesser extent) mining. Furthermore, we believe that Fluor’s strong track record, integrated solution capabilities, and strong balance sheet will continue to differentiate the firm from its E&C rivals and help it win its fair share of awards, particularly complex megaprojects that Fluor is known for.
Fluor is a holding company. Through its subsidiaries, the company provides engineering, procurement, construction, fabrication and modularization, operations, maintenance and asset integrity, as well as project management services. The company serves a set of industries including oil and gas, chemicals and petrochemicals, mining and metals, transportation, power, life sciences and manufacturing. The company is also a service provider to the U.S. federal government and governments abroad; and it performs operations, maintenance and asset integrity activities for industrial clients. The company has four segments: Energy & Chemicals; Mining, Industrial, Infrastructure & Power; Diversified Services; and Government.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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