In this article, let's take a look at Fluor Corporation (FLR, Financial), a $9.31 billion market cap company, which is one of the world's largest engineering, procurement and construction companies, with more than 65% of its backlog derived from outside the U.S.
Other Segments
The company operates in different segments: Oil and Gas 42% of 2013 revenues, Industrial and Infrastructure, 41%; Global Services, 2%; Government, 10% and Power, 5%. Obviously, more than 80% is concentrated in the O&G and I&I businesses, the other three business segments should become more important in the future. For example, new gas-fired plants or alternative energy should contribute to the firm's power segment.
Growing Demand
As emerging markets are growing, demand has increased for natural resources. A possible scenario of more energy and mining projects could perfectly be reached and we believe the company is capable to be involved on those projects. We think this due to its ability to win some valuable contracts in recent years.
High Costs
Despite more demand, the firm has poor margins due principally to a higher percentage of cost-plus contracts. Also, it has been working on projects in new markets where cost controls are difficult to monitor and control.
Revenues, Margins and Profitability
Looking at profitability, revenues declined by 18.62% but earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.15 vs $1.05). During the past fiscal year, the company increased its bottom line. It earned $4.06 versus $2.69 in the previous year. This year, Wall Street expects an improvement in earnings ($4.20 versus $4.06).
The gross profit margin is very low, it is at 7.89%, but it has increased from the same period last year. The net margin is at 2.07% which is ranked higher than 64% of the 1159 Companies in the Engineering & Construction industry.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| FLR | Fluor | 12.55 |
| JEC | Jacobs Engineering Group Inc | 7.48 |
| CBI | Chicago Bridge & Iron Company | 24.13 |
| KBR | KBR Inc | -3.15 |
| MTZ | MasTec Inc | 12.88 |
| Â | Industry Median | 8.25 |
The company has a current ROE of 12.55% which is higher than the industry median and the ones exhibit by Jacobs Engineering (JEC, Financial), KBR (KBR, Financial) and MasTec (MTZ, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Chicago Bridge & Iron Company (CBI, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 20.9x, trading at a premium compared to an average of 18.6x for the industry. To use another metric, its price-to-book ratio of 2.6x indicates a premium versus the industry average of 1.31x while the price-to-sales ratio of 0.4x is below the industry average of 0.52x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $15.436, which represents a 9.1% compound annual growth rate (CAGR).
Final Comment
The company has a strong balance sheet, with almost four times cash to debt. Fluor Corp's Cash to Debt Ratio for the quarter that ended in Sep. 2014 is at 3.92. This excess of cash is ideal to make acquisitions when necessary.
Despite increased demand and competition, Fluor could take advantage and focus on more higher-margin projects, which are expected to be fixed-price contracts.
Moreover, the PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like John Buckingham (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Scott Black (Trades, Portfolio), Alan Fournier (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) have added this stock to their portfolios in the third quarter of 2014, as well as Dodge & Cox.
Disclosure: Omar Venerio holds no position in any stocks mentioned
