FLR - Fluor: Elevated Activity Points To A Rising Share Price

2023-04-13 09:56:21 ET

Summary

• The company reported positive GAAP earnings in fiscal 2022 (First year in five).
• The market through the long-term technicals continues to price in the ramifications of more work being completed and the higher reimbursable backlog.
• Shares are still by no means expensive, which is why we see more gains here.

Intro

We wrote about Fluor Corporation (FLR) in mid-2021 when we stated that the company's bullish forward-looking fundamentals at the time needed to finally make themselves known in the stock's financials. The reason being is that Fluor's operating cash flow at the time was coming in negative as the company continued to feel the brunt of the Covid-19 pandemic. Suffice it to say, with book value falling, management was grappling with how to invest as efficiently as possible while at the same time cutting costs to the bone in order to protect the financials. This is a difficult task even in the best of times especially when considering Fluor's low single-digit profit margins being continuously pressured by rising costs. Fluor's keen valuation (Where sales were trading for pennies on the dollar) and strong backlog were the principal calling cards in the stock at the time. Trading conditions (Where Fluor could run through its workload at a much faster clip) simply needed to stack up though for the company to realize its potential.

Fast forward roughly 22 months and we see that shares have managed to rally over $10 a share which is almost a 50% gain (Greater than 25% annualized) since our mid-2021 commentary. Gains actually surpassed 80% up until early March but elevated volatility over the past six weeks or so has seen Fluor come well off its 2023 highs.

However, if we look at Fluor's long-term chart, we see two technical details which are bullish in nature. First is the crossing over of the stock's 10-month moving average above its corresponding 40-month counterpart (Which led to a strong rally). More importantly, however, is the turning up of that 40-month moving average which is a clear demonstration that Fluor's long-term trend has changed here. Suffice it to say, if present trends can continue, there is every possibility that Fluor eventually tests its upper multi-year trend line shown below. Trends from the company's latest fiscal year can provide us clues on whether this is a possibility in this regard.

The key trend we witnessed in fiscal 2022 was the return to profitability concerning bottom-line GAAP earnings. Net profit came in at $145 million (First profitable year since 2018) with strong bottom-line growth expected to continue in fiscal 2023 & beyond. Reasons for this quick turnaround in fortunes for Fluor comprise of the following.

Reimbursable Backlog % Continues To Rise

Pulling in receivables ($2+ billion at the end of fiscal 2022) in a timely manner has always been a difficult task in this industry especially when demand tapers off somewhat. Furthermore, having to file suit in order to collect funds outstanding can present an enormous opportunity cost, especially in times of high inflation. Management went to work on this in recent years by focusing more on deals that presented less risk to its balance sheet and we can see the fruit of this endeavor in Fluor's current backlog. The company's reimbursable backlog came in at 63% at the end of fiscal 2022 so the more this key metric grows, the higher the probability that liquidity ratios will continue to improve. Having an improved risk-adjusted backlog enables management to strengthen the balance sheet which is what we have seen seeing. At the end of fiscal 2022, Cash & ST investments improved to $2.62 billion and long-term debt dropped to $978 million. Suffice it to say, all of the above trends are conducive to the sustained generation of cash flow over time once legacy deals can be dealt with in full.

"New Awards" On The Increase

Secondly, the direction of the company and management's decision a few years back to diversify Fluor beyond the traditional oil and gas sector is now beginning to bear fruit with respect to what we see coming down the track here (Pipeline). The Urban Solutions business for example ( Mining & Metals , Advanced Technologies and Life Sciences & Infrastructure) all showed promise in fiscal 2022 where ample opportunities exist for a significant level of repeat business from existing customers. Furthermore, Energy Solutions, Energy Transition & Mission Solutions segments all increased their "new awards" in 2022 with significant potential to bid for large deals going forward. This means investors should not be surprised by the company's pretty impressive guidance for fiscal 2023.

Suffice it to say, given Fluor's level of growth activity in the right areas (Where demand remains elevated), we see shares continuing to make long-term gains here. From a sales standpoint, shares remain ultra-cheap (Forward sales multiple of 0.29), and now with profitability on the rise, the market should continue to price shares higher here.

Conclusion

Therefore, to sum up, Fluor shares continue their ascent despite recent volatility. Forward-looking earnings expectations remain encouraging with increasing new awards across a whole host of segments now becoming the norm. Let's see what Q1 brings. We look forward to continued coverage.

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