FLR - Fluor: Energy Segment Continuing To Drive The Company Forward

2023-09-19 05:12:22 ET

Summary

• Fluor Corporation stock has returned over 21% in the past 11 weeks, easily outperforming the S&P 500.
• Technical indicators suggest further gains for FLR, with strong momentum and a history of rising prices.
• Forward-looking earnings projections for Fluor have been increasing, with a 21%+ increase in the fiscal 2023 bottom-line estimate in the past month alone.

Intro

We wrote about Fluor Corporation ( FLR ) back on the 1st of July when we reiterated our BUY signal on the stock. Bullish technicals, strong guidance, and a growing backlog where a rising reimbursable rate all pointed to a rising share price over time. Suffice it to say, over the past 11 weeks or so, shares have returned just over 21% which is an excellent return considering the S&P500 comes in basically flat over this time period. Furthermore, we see further gains here which the technicals are alluding to as we see below.

Momentum To Continue

Although FLR has moved off its recent September highs, notice how the most recent intermediate RSI reading comes in above its comparable some 10 months ago. This points to strong momentum and the absence of a negative divergence which many times means lower prices are on the horizon. Furthermore, Fluor's recent intermediate golden cross has led to rising prices in past times as we see in late 2020 and late 2021. Suffice it to say, we are looking for history to repeat itself here, with strong forward-looking earnings growth being the main precursor for the market to push this stock higher.

With two quarters still to be reported in Fluor's present fiscal year, for example, look at how forward-looking earnings projections have been dialed up in recent months. Projected growth is in fact reaccelerating as the company's fiscal 2023 bottom-line estimate of $2.11 per share has already increased by 21%+ over the past month alone whereas the 3-month upward revision comes in at 27%+

Big Picture Analysis

If we look at Fluor from a big-picture perspective initially, trends in the three areas below point to fundamental strength in the company going forward. Firstly, the reimbursable rate of new work continues to outpace the rate of the existing backlog. Fluor's reimbursable run rate (70%) of new work ($3.5 billion) in Q2 outpaced the reimbursable run rate of the company's total backlog in general (64%). Secondly, the margins of Fluor's newly acquired work continue to come in ahead of the average margin of the backlog (200 basis points improvement in Q2). Thirdly, given how trading conditions have changed in Fluor's segments for the better, the company has a significant number of prospects at its disposal from which work could be won going forward. The Engineering, procurement, and construction management area for example continues to see significant activity from which Fluor fully intends to take advantage.

Q2 Trends

In the second quarter, topline revenues hit $3.9 billion which was a 20% increase over the same period of 12 months prior. The primary reason for the spike in sales was the performance of 'Energy Solutions' although the ramp-up of activity in the 'Urban Solutions & 'Mission Solutions segments also were reasons for the increase. Profitability also came in strong in the quarter as EBITDA increased to $170 million for the quarter compared to $105 million for the same period of 12 months prior. Based on current trends, management decided to raise bottom-line guidance for fiscal 2023 (EPS of $2 to $2.30) which consensus has obviously acted upon as alluded to earlier.

Fluor's margins are the most favorable in 'Energy Solutions' so it is encouraging to see that the company expects some significant awards in this space over the latter part of the year. Expected fiscal 2023 awards include a Canadian Chemical complex (Dow's path to zero ethylene), a $1+ billion refinery in Mexico & a nuclear engineering project in Romania. These projects come on top of $753 million of new awards won in the second quarter. While new awards in Q2 in 'Energy Solutions' came in lower compared to the same period of 12 months prior, execution activity remains elevated with the company also benefitting from positive forecast adjustments ($70+ million in Q2 alone).

Conclusion

Therefore to sum up, when we consider Fluor's increasing profitability, bullish earnings revisions as well as bullish technicals, we would be surprised if Fluor does not take out its March 2023 highs in this present intermediate up-move. Energy Solutions with its growing margins and accelerated execution continues to drive the company forward. We look forward to continued coverage.

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