FLR - Fluor: Stock Has A Positive Outlook With Steady Flow Of Contracts

2024-01-20 07:11:11 ET

Summary

• Fluor Corporation is expected to perform well in 2024 due to a consistent influx of contracts, which will contribute to revenue growth.
• The company has a favorable valuation and is projected to experience strong revenue and earnings growth in the current year.
• These positive factors indicate a promising outlook for Fluor Corporation in 2024.

Fluor Corporation ( FLR ) looks positive in 2024 as it has been getting a steady amount of contracts to boost revenue. The company has a reasonable low valuation with strong expected consensus revenue and earnings growth for this year. I expect the stock to have a positive year in 2024 as revenue/earnings growth drive the stock higher from the low valuation level.

Fluor is involved in engineering, construction, maintenance, and supporting services for the energy, infrastructure, metals/mining, life sciences, and advanced technology industries. Fluor operates globally with projects all over the world. The company also serves various governments for a variety of projects. Fluor's services are needed to solve a variety of projects including standard construction, but also highly technical projects such as decarbonization, carbon capture, waste-to-energy, nuclear power, and more.

Recent Contract Awards for Ongoing Growth

Fluor has been getting a steady flow of contracts, which has been providing consistent growth. Here are some recent contract awards. In the beginning of November 2023, Fluor was awarded a contract from BHP Canada ( BHP ) to develop stage 2 of its Jansen Potash project in Saskatchewan as part of its Metals & Mining business. The amount of the contract was not disclosed, but it is considered a multi-million dollar project.

Fluor is expected to recognize the contract value in Q4 2023. So, while the amount won't go towards Fluor's 2024 revenue, it will go towards its Q4 2023 revenue & earnings results, which will be reported on February 21,2024 . The Q4 earnings report is likely to be boosted by the revenue/earnings from this project. As a result, it could have a positive impact on the stock in early 2024.

In 2023, Fluor was awarded 2 contracts from Dow ( DOW ) valued at over $3 billion for the world's first net-zero scope 1 and 2 emissions integrated ethylene cracker and derivatives complex in Alberta, Canada. As part of the contract, Fluor will be responsible for engineering and construction management of a new ethylene cracker unit and for related facilities. Dow estimates that the complex is expected to decarbonize about 20% of its global ethylene capacity, while growing its polyethylene capacity by about 2 million metric tons per year.

Fluor recognized the revenue from the Dow project in Q3 2023. However, I wanted to mention it because it shows how Fluor is relied upon for innovative projects that can positively impact the environment. This is likely to lead to additional similar projects in the future. The Canadian Net Zero Emissions Accountability Act which has been in effect since 2021 is likely to create the need for more of these types of projects.

Fluor received an updated contract amount in the beginning of January 2024 for services relating to the Gordie Howe bridge, which connects Detroit to Canada. The project was originally to be completed by November 2024. However, delays pushed the expected opening to September 2025. Fluor has a 40% interest in Bridging North America, the organization responsible for building & operating the bridge. The original contract amount of C$5.7 billion or $4.26 billion was upgraded to C$6.4 billion or $4.77 billion.

The benefit to Fluor from the upgraded contract amount for the bridge is a reduction of $200 million in cash burn from the project.

Growth Outlook for Infrastructure

At the end of Q3 2023, Fluor had a total backlog of $26 billion , which is 2.4% higher than at the end of Q3 2022. Fluor's backlog can continue to grow in 2024 from higher expected infrastructure spending. It is estimated that the U.S. government will increase infrastructure spending by 12.9% to $436 billion in 2024 .

Fluor should also receive new contracts from the private sector in 2024. The Dodge Construction Network estimates that total construction starts will increase by 7% to $1.2 trillion in the U.S. in 2024. This growth is based on expectations of a lower rate of inflation in 2024. This strong growth is likely to create demand for Fluor's construction & engineering services.

The global infrastructure as a service [IaaS] market is expected to grow by about 26% annually to reach $807 billion by 2032. So, Fluor is likely to have a long-term tailwind from this expected growth in 2024 and beyond.

Valuation

Fluor is in a great position valuation-wise as the stock is trading below its peers. Here's how Fluor stacks up against the sector and its peers:

source: Seeking Alpha

We can see in the table above that Fluor has a lower valuation than all of its publicly traded peers and the sector median. Fluor is currently valued 24% below the sector median. Therefore, Fluor's stock has more room to move higher.

Fluor's consensus expected revenue growth of 8% and earnings growth of 9% for 2024 can help drive the stock higher if expectations are met or exceeded. The expected revenue and earnings growth can be achieved by fulfilling the current backlog and through a steady stream of new contracts. The backlog of $26 billion can cover all of Fluor's expected revenue of $16.9 billion for 2024 and 49% of the expected revenue of $18.4 billion for 2025.

Technical Perspective

The daily chart above shows a strong uptrend since May 2023. However, the stock dipped since the price hit the 52-week high of $40.77. Currently, there are two bullish divergences on the daily chart.

The first bullish divergence is the period between November 2023 into the beginning of January 2024. During this period, the RSI's lows remained even while the stock price made a pronounced move higher. The second bullish divergence on the daily chart is indicated by a lower low on the stock price and a higher low on the RSI indicator during the first few weeks in January.

From what I have observed, these divergences typically result in trend reversals where the stock is likely to form a new uptrend or continue a longer-term established trend. We can see a bullish divergence between March and May of 2023 where the stock displayed a downward price movement while the RSI increased. The stock made a significant move higher from that divergence.

The technical story supports Fluor's positive fundamental outlook for growth in 2024. This should result in a higher stock price for Fluor in 2024 if conditions go well for the company and the overall economy.

Areas in Need of Improvement

While Fluor does look positive overall, the company does have some room for improvement. Most of Fluor's profitability metrics are low and below the sector median. Fluor's gross margin is only 3.5%, significantly lagging the sector median GM of 30%. The company's EBITDA margin of 2.6% and net income margin of 1.1% lag the sector median EBITDA margin of 13.9% and net income margin of 6%. Fluor should look for opportunities for higher efficiencies to boost margins.

Fluor also lags in its return metrics. Fluor's ROE of 5.9% lags the sector median of 12%. The company's ROIC of 6% falls shy of the sector median of 7%. The ROA of 2.4% is less than half of the sector median of about 5%. Typically, I like to see companies achieve double-digit margins returns. Higher margins and returns help drive strong earnings growth.

Fluor's Investment Outlook

I'm not impressed with Fluor's low margins and returns. If the company was fairly valued, the stock probably would only match the performance of the S&P 500 ( SPY ) at best. However, since Fluor is trading 24% below than the sector median on a forward PE basis, the stock has a chance to outperform the broader market in 2024 in my opinion. Analysts have a one-year price target of $45 for the stock, which is 22% higher than the current price. The price target would take the PE up to about 15.8x, based on consensus expected EPS of $2.84 for 2024. This is still below the sector median forward PE of 18.7x.

If Fluor continues to be awarded a steady flow of contracts, while fulfilling the backlog, the company can meet/exceed its revenue and earnings expectations. A steady stream of new contracts looks likely due to the positive outlook for U.S. and global infrastructure projects. As a result of the undervaluation and the expected growth, Fluor has a chance to outperform the S&P 500 in 2024.

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