Morningstar | Fluor Reports Improved 2Q Results; We Increase Our Fair Value Estimate Slightly
We have raised our $51 per share fair value estimate to $52 after encouraging second-quarter results by narrow-moat global engineering and construction firm Fluor, chiefly due to the time value of money since our last update. Shares reacted positively to the results, which beat analyst earnings and revenue estimates. In May, we noted that investors had overreacted to challenges related to cost overruns at a gas-fired Florida power project, causing the stock to fall sharply by 22%.Our outlook for Fluor is predicated on a global capital spending upcycle, reflecting accelerating economic growth, firmer crude oil prices, and incentives for E&C customers from U.S. tax and regulatory reforms. We believe lower U.S. corporate tax rates, regulatory reforms, and repatriation incentives will combine to boost returns, reduce risks, and free up capital for use in a wide range of discretionary projects. Fluor has also benefited from crude-oil prices remaining well above Morningstar projections, with over 40% of its roughly $4.9 billion revenue in the second quarter of 2018 coming from energy and chemical sector projects.
In the second quarter, Fluor reported $115 million in earnings or $0.81 per diluted share. This compares favorably with a loss of $24 million, or $0.17 per diluted share, in the second quarter of 2017. Total revenue was $4.9 billion, while new awards were $5.4 billion. This represents a positive development for the company because it is the first time new awards have exceeded revenue since 2016. However, the large energy and chemicals segment generated profit of just $97 million compared with $124 million a year ago. Meanwhile, the mining, industrial, infrastructure, and power segment improved profit to $16 million compared with a loss of $165 million last year.
Notable new awards include a Los Alamos National Laboratory contract, a Naval Nuclear Laboratory contract, and a notice to proceed for a liquefied natural gas project in Kitimat in Canada. With these second-quarter results, Fluor remains on track to deliver diluted EPS within management’s guidance, which remains unchanged from the prior quarter. Guidance was reduced following first-quarter results from $3.10-$3.50 to the current range of $2.10-$2.50 following material cost overruns. This guidance nevertheless assumes an increase over EPS of $1.63 in 2017, further highlighting that the firm is poised to benefit from a cyclical upturn.
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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