On Aug 26, we maintained our Neutral recommendation on Fluor Corporation (FLR - Free Report) . The company reported a 3.1% year-on-year rise in earnings and a 1.4% increase in revenues. However, both the top and bottom lines missed the Zacks Consensus Estimate.
The company is expected to benefit from improvements in the oil and gas segment, which is expected to be partially offset by the slowdown of growth opportunities in the company’s mining and metals business as well as unexpected claim charges. Therefore, the company lowered its upper-end guidance for 2013 and now expects 2013 earnings to be in the range of $3.85–$4.20 per share, down from its earlier guidance of $3.85–$4.35.
Why the Reiteration?
On Aug 1, Fluor Corporation reported second-quarter 2013 net earnings of $161 million or 98 cents per share, well below the Zacks Consensus Estimate of $1.01. Quarterly earnings increased 3.1% year over year from 95 cents a share. Profits during the second quarter were primarily driven by growth in the Oil & Gas segment, partially offset by a charge of $17 million related to outstanding embassy claims.
Total revenue came in at $7.2 billion, compared with $7.1 billion in second-quarter 2012. Top-line growth came on the back of strong performance in the Oil & Gas segment. Consolidated backlog was $37 billion at quarter-end, down from $37.5 billion in the second quarter of 2012, primarily due to the downturn in the mining and metals market.
Following the release of the second-quarter results, the Zacks Consensus Estimate for fiscal 2013 declined 1.4% to $4.08 per share. Moreover, the Zacks Consensus Estimate for fiscal 2014 also contracted 1.1% to $4.60 per share.
Fluor has a proven track record of on-time project completion, thereby ensuring client satisfaction. The company strives hard to complete all its projects on schedule while meeting, or, in fact, exceeding the client specifications. Further, in a cut-throat competitive environment, Fluor continuously emphasizes on cost controls so that it delivers not only the performance requirements specified by its clients but also their budgetary needs. Hence, these initiatives give Fluor the extra edge and a distinct competitive advantage.
In addition, Fluor’s market diversity is a key strength that helps it to mitigate the impact of the cyclicality in the markets in which it operates. Therefore, market diversification allows Fluor to achieve more consistent growth and deliver solid returns. The company’s strategy of maintaining a good mixture within its entire business portfolio permits it to both focus on the more stable business markets and to capitalize on developing the cyclical markets when the timing is appropriate.
However, a highly competitive business environment has continuously pressured margins. This competitive environment is expected to continue and may result in more lump-sum project execution for the company. In some instances, margins are being negatively impacted by the change in the mix of work performed. For example, a higher mix of construction-related work and a higher content of customer-furnished materials typically generate lower margins than engineering work or projects without customer-furnished materials.
Further, the company carries the risk of cost overruns worth approximately 15% of the dollar value of its contracts. It may experience reduced profits, or in some cases, losses under these contracts if costs increase above its estimates. It depends on third parties to complete many of its contracts.
Other Stocks to Look For
Currently, Fluor Corporation retains a Zacks Rank #3 (Hold), which also justifies the recommendation.
Some other stocks that are performing well in the industry where Fluor operates include Michael Baker Corp. , VSE Corp. and AO Smith Corp. (AOS - Free Report) . Michael Baker Corporation carries a Zacks Rank #1 (Strong Buy), while VSE Corp. and AO Smith Corp. carry a Zacks Rank #2 (Buy).