Morningstar | Fluor Stock Plunges on Large Earnings Miss and CEO Step-Down; Lowering FVE
We cut our fair value estimate for no-moat engineering and construction firm Fluor to $40 from $46 after the firm posted a $0.42 net loss per diluted share in the first quarter, lowered its adjusted EPS guidance range, and announced a CEO transition. Our fair value change is primarily driven by more pessimistic revenue growth and operating margin assumptions for full-year 2019 and 2020.Sales dropped nearly across the board, as revenue declined from the same prior-year period by 24% in energy and chemicals, 41% in government, and 15% in diversified services. The only bright spot was mining, industrial, infrastructure, and power, which delivered 52% year-over-year revenue growth thanks to increased activity in mining and metals. Earnings were also weighed down by project charges, restructuring charges, and foreign exchange and tax impacts.
Fluor announced that CEO David Seaton has stepped down as CEO and director after eight years at the helm. He will remain at Fluor and assist the transition, as Carlos Hernandez (previously chief legal officer and secretary since 2007) takes over as interim CEO. Although Fluor’s press release said that the firm will look for a permanent replacement, we expect that Hernandez will eventually become the permanent CEO based on comments made on the earnings call. Concurrently, former CEO Alan Boeckmann was named executive chairman of the board.
As we mentioned in our April 29 report, one of the reasons for our downgrade of Fluor’s moat rating from narrow to none was our concern about the shift of Fluor’s backlog toward fixed-price contracts (currently roughly half of the backlog), which increase the risk of cost overruns. Fluor devoted a large portion of its 2018 investor day presentation to planned improvements to mitigate execution risk, so it is disappointing to see problems continue on that front. As such, we look forward to hearing more about new CEO Hernandez’s plans to address execution issues.
Fluor’s stock plunged roughly 25% in morning trading on May 2 after the earnings miss, and we view the sell-off as overdone, with the stock dropping into 4-star territory. Shares are currently trading approximately 25% below our new fair value estimate, and the pullback might present an attractive entry point for patient investors willing to stomach the high uncertainty and risk that execution issues continue. For investors seeking a larger margin of safety, our 5-star stock price is approximately $24 per share.
On the bright side, we still think that Fluor has solid growth prospects and can continue to capitalize on opportunities in refining, liquefied natural gas, petrochemicals, and, to a lesser extent, mining. Considering Fluor’s track record and recent LNG wins, we expect the company to capitalize on future opportunities in this space, as we expect a ramp-up in new LNG projects over the next few years. The company submitted bids for the Mozambique Rovuma LNG and Next Decade Rio Grande LNG projects, and the final investment decisions for both projects are expected in the second half of 2019.
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.
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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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