FLR - Fluor: Improving Backlog To Continue To Drive Shares Northward

2023-07-01 00:22:49 ET

Summary

• Management reiterates its full-year guidance on the Q1 earnings call.
• The technicals remain bullish as consensus continues to revise up its forward-looking earnings estimates for fiscal 2023 and beyond.
• Fluor's bullish fundamentals stem from its improving backlog where the reimbursable percentage continues to grow in each quarter.

Intro

We issued a buy signal on Fluor Corporation ( FLR ) in April of this year due to strength in multiple segments and a more attractive backlog. Although shares are marginally down since we issued the 'Buy' signal (>2%), there remains plenty of evidence that higher prices are still on the cards for the industrial engineering & construction company.

From a core technical standpoint, the pending intermediate bullish crossover is Fluor's best intermediate or swing-play opportunity for quite some time. We state this because of the speed at which the intermediate histogram has made its way back toward the zero line. Additional gains over the near term (which will essentially result in a confirmed MACD crossover & the histogram entering positive territory) would enable investors to add to their existing long positions.

Short-Term Chart

What we note above is also evident on a more near-term chart. The bounce out of the stock's June 23rd lows last week has maintained the ADX trend-following indicator in positive territory. Furthermore, we have a marginal breakout above the depicted downcycle trend line but more time needs to pass here (with shares remaining above this trendline) here to confirm the breakout.

Value Proposition Continues To Improve

Although Fluor missed estimates in Fluor's recent first-quarter earnings numbers, revenues of close to $3.8 billion beat consensus and increased by approximately 20% over the same period of 12 months prior. Sales in the quarter were driven by the company's much-improved ability to get projects over the line across a range of businesses (Life Sciences, mid-scale LNG, etc). In fact, management called out the Marathon L.A. project team for deserved recognition due to getting this sizable project over the line with 9 days to spare. This achievement was a credit to sheer hard work and resilience and bodes well for future growth in Fluor especially considering how the quality of the company's backlog has been steadily changing for the better.

Furthermore, the CFO on the recent Q1 earnings call affirmed Fluor's long-term 2026 guidance as well as 2023 bottom-line guidance of approximately $1.70 a share alongside 10% top-line growth for the fiscal year. The trends below really bode well for the valuation of the stock where consensus has already revised up its bottom-line target for fiscal 2023 by over 5% over the past three months. This means Fluor's 2023 price-to-earnings ratio has now dropped to approximately 17 whereas the company's forward price-to-sales ratio has dropped to 0.28. Therefore considering how the company is improving on its execution efforts notwithstanding the fact that shares are marginally down over the past 10 to 12 weeks means the investment case on the long side in fact looks healthier here in FLR than in past months.

Bullish Fundamentals

The quality of the company's execution is directly correlated to how its backlog has been changing for the better. Fluor's total backlog inched up to 64% reimbursable at the end of Q1 with the ' Energy Solutions' segment driving new awards forward. Furthermore, although the 'Urban Solutions' segment reported a slight loss due to a Legacy project, the 'Mining & Metals' segment continues to gain traction with a significant amount of work yet to be quoted for in the lithium & copper fields. The same can be said for the Advanced Technologies & Life Sciences business where there remains a large runway for growth here which once more was confirmed by some significant awards in the quarter.

Managing legacy contracts to the best of the company's ability whilst continuing to secure higher-margin reimbursable contracts remains key for Fluor going forward and we can already see momentum in this endeavor. In fact, over the past three years, Fluor's legacy risk in the backlog has been already cut in half ($1.7 billion) which means cash-flow generation (on the whole) should continue to rise especially once the company gets past fiscal 2024.

The one disclaimer we would put out there is the following. No matter how trading conditions may change in upcoming years, management needs to ensure that it will stick to its guns with respect to not being hasty in securing 'signature' deals going forward. Large projects can act as a godsend when trading conditions become difficult but history has shown that the scope of these projects can become too much especially if contingencies are not scrupulously ironed out beforehand. At present, investors are watching the company's coverage regarding the backlog up to 2026. Fluor's share price to a large degree will continue to trade off the improving quality of this backlog. Suffice it to say, the fundamentals remain strong but diligence will continue to be required on every deal.

Conclusion

To sum up, when we take into account Fluor's recent Q1 earnings report, the stock's bullish technicals, forward-looking guidance, and the continued improvement of the overall backlog, we maintain that Fluor remains a BUY at this present juncture. We look forward to continued coverage.

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