Where's the Floor for Fluor?

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Fluor (NYSE: FLR) has tumbled nearly 12% over the past week. Even over the past year, Flour is down 9.14% while the S&P 500 is up 10.85%.

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With Flour grossly underperforming the broader market, what's the near-term catalyst to push the stock higher? One of the big tailwinds should be bolstering global growth. The IMF expects global GDP to grow 3.3% for 2013 against 3.2% for 2012. Analysts expect Fluor to grow EPS by an annualized 11.5% over the next five years, which will be spurred by that expected growth in global GDP.

Fluor provides a range of services, including engineering, construction and project management, serving the oil & gas industry, chemical, transportation, mining and metals, power, life sciences and manufacturing industries, which makes it heavily tied to the global economy. However, I am encouraged by its impressive end-market diversity. 

Its oil & gas segment (35% of revenues) serves the global oil and gas production and processing industries. The industrial and infrastructure segment (44% of revenue) provides design and engineering services for transportation, wind power, mining and metals and telecommunications.

Key tailwinds 

  • Fluor's market diversity is a key strength that helps mitigate cyclical market impacts.
  • Sizable oil and gas orders outside the U.S. (75% of the awards derived from outside the U.S.)
  • Robust order backlog diversified across various geographical regions. The backlog breakup is as follows:  the U.S. (25%), the Americas (excluding U.S.) (35%), Europe, Africa and the Middle East (25%), and Asia-Pacific (including Australia) (15%).
  • Management recently upped the lower end of its earnings guidance, with the low-end expected to be between $3.60 and $3.80, up from $3.50 to $3.80.
  • The company trades at 11.6 times forward earnings, which is at the very low end of its five year range; 8.6 to 36.9. 
  • Fluor also trades cheaply on a price to book basis, trading at 2.7 times book value, versus its five year range of 2.2 times to 6.9 times.

On the other hand, Fluor had some of the largest negative sentiment from hedge funds going into 2013. There were 24 hedge fund long the stock, which was a 25% decrease from one quarter earlier (check out which funds dumped Fluor).

Other notable industrials

URS (NYSE: URS) is another provider of engineering, construction and technical services. The downside for URS is that 40% of revenues (compared to Fluor's 12%) are tied to its federal services division, which provides program management and engineering to U.S. government agencies, primarily the Department of Defense, the National Aeronautics and Space Administration and the Department of Homeland Security. Thus any reduction in government spending is a big negative for the company, so the recent U.S. budget cuts could have a negative impact on the company. 

Going into 2013, there were only 17 hedge funds long the stock. However, there were some big name hedge funds owning the stock, including Glenview Capital, D. E. Shaw, Pzena Investment Management and AQR Capital (check out AQR's small cap picks).

Chicago Bridge & Iron (NYSE: CBI) has a broad diversity within the entire energy project spectrum, and over 80% of its revenues are generated from projects outside the U.S. It's also a leader in the LNG storage niche market. The company expects opportunities in this segment, namely in the LNG/low temperature storage systems area. As well, its waste and waste water tanks and power applications are expected to perform nicely in emerging markets.

The big news for Chicago has been its acquisition of Shaw, which should give the company even greater exposure to the energy markets. Its 2013 guidance shows that the combined (Chicago-Shaw) entity will generate $6 billion more in new awards and $4.5 billion more in revenues. 

However, going into 2013 there were a total of 32 hedge funds long the stock, an 11% decrease from one quarter earlier. Little known hedge fund, Robert Pitts's Steadfast Capital, had the most valuable position in Chicago at the end of 2012, with a position close to $242 million, comprising 6.5% of its total 13F portfolio (check out the funds that dumped Chicago). 

Don't be fooled 

In reality, Flour has the best balance sheet with a debt to capital ratio of 14%, compared to URS' 35% and Chicago's 35%. However, the real takeaway is that there is no "true" competitor for Flour. The best way to measure these infrastructure and engineering related companies is the pulse of their underlying markets and broader economy. It's encouraging that global GDP is expected to grow year over year in 2013, and that Fluor already has a robust backlog. 

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool owns shares of Fluor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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