Rating Update: Stock Rating F-Lowest (11/11/19)-Fluor Corp (FLR).

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BUSINESS

Fluor Corporation, through its subsidiaries, provides engineering, procurement, construction, fabrication and modularization, commissioning and maintenance, and project management services worldwide. The company’s Energy & Chemicals segment offers a range of design, engineering, procurement, construction, fabrication, and project management services in the upstream, midstream, downstream, chemical, petrochemical, offshore and onshore oil and gas production, liquefied natural gas and pipeline markets. Its Mining, Industrial, Infrastructure & Power segment provides design, engineering, procurement, construction, and project management services to the mining and metals, transportation, life sciences, advanced manufacturing, water, and power sectors.
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INVESTMENT RATING

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FLR’s future returns on capital are forecasted to be in line with the cost of capital. Accordingly, the company is expected to be Value Creation neutral.

Fluor has a current Value Trend Rating of F (Lowest Rating).
This rating combines inconsistent signals from two proprietary PTR measures of a stock’s attractiveness. Fluor has a neutral Appreciation Score of 54 but a very low Power Rating of 2, producing the Lowest Value Trend Rating.

Fluor’s stock is selling well below targeted value. The current stock price of $18.89 compares to targeted value 12 months forward of $24.
This neutral appreciation potential results in an appreciation score of 54 (46% of the universe has greater appreciation potential.)
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Fluor has a Power Rating of 2. (Fluor’s very low Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 2% of companies in the universe.)
Factors contributing to this very low Power Rating include: Fluor’s earnings estimates have fallen very significantly in recent months; recent price action has been extremely unfavorable; and is in a slightly weakened position current.

INVESTMENT PROFILE

Fluor’s financial strength is average. Financial strength rating is 57.
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Relative to the S&P 500 Composite, Fluor Corp has significant Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that FLR is higher risk. All factors are relative weaknesses. Relative weaknesses for Fluor include: low financial strength, high stock price volatility, low expected growth, and low historical growth. Fluor’s valuation is low: high dividend yield, low P/E ratio, and low price/book ratio. FLR has unusually low market capitalization.

CURRENT SIGNALS

Fluor’s current operations are strong. Return on equity is rising, reflecting: widening pretax margins; rising tax keep rate; and rising leverage.

Fluor’s current technical position is mixed. The stock price is in a 0.7 month up move. The stock has appreciated 22.8% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average. Fluor’s stock price decline is extreme and the stock appears oversold.

ALERTS

Important negative changes in Fluor Corp (NYSE: FLR) fundamentals have recently occurred: the consensus estimate for December, 2020 decreased significantly, and significant quarterly earnings deceleration occurred.
The stock is currently rated F.
Fluor Corp (NYSE: FLR) stock closed at $1.18 on 11/11/19 after a major increase of 12.4%. Moreover, this advance was accompanied by unusually high trading volume at 157% of normal. The stock has risen 1.6% during the last week but has been extremely weak relative to the market over the last nine months.

CASH FLOW

In 2018, Fluor experienced no change in cash of +$14.4 million (+1%). Sources of cash balanced uses. Cash generated from 2018 EBITDA totalled +$646.2 million. Non-operating sources contributed +$61.3 million (+9% of EBITDA). Cash taxes consumed -$188.8 million (-29% of EBITDA). Withdrawal of investment from the business totalled +$107.3 million (+17% of EBITDA). On a net basis, debt investors pulled out -$7.7 million (-1% of EBITDA) while equity investors withdrew -$604.0 million (-93% of EBITDA).
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Fluor’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Fluor Corp Peer Group. (Since 2015 Non-operating Income, %EBITDA has sharply accelerated.) In most years, Fluor was in the third quartile and lower quartile. Currently, Fluor is upper quartile at +9% of EBITDA (+$61.3 million).

Fluor’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Fluor Corp Peer Group. In most years, Fluor was in the lower quartile and second quartile. Currently, Fluor is lower quartile at -29% of EBITDA (-$188.8 million).

Fluor’s Business Re-investment, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Fluor Corp Peer Group. (Since 2016 Business Re-investment, %EBITDA has experienced a very sharp recovery.) In most years, Fluor was in the second quartile and top quartile. Currently, Fluor is upper quartile at +17% of EBITDA (+$107.3 million).

Fluor’s Debt Investors, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Fluor Corp Peer Group. In most years, Fluor was in the second quartile and top quartile. Currently, Fluor is slightly above median at -1% of EBITDA (-$7.7 million).

Fluor’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Fluor Corp Peer Group. In most years, Fluor was in the third quartile and lower quartile. Currently, Fluor is lower quartile at -93% of EBITDA (-$604.0 million).

Fluor’s Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Fluor Corp Peer Group. (Since 2016 Change in Cash, %EBITDA has experienced a very sharp recovery.) In most years, Fluor was in the third quartile and second quartile. Currently, Fluor is at median at +2% of EBITDA (+$14.4 million).
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Fluor’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Fluor Corp Peer Group as well. In most years, Fluor was in the top quartile. Currently, Fluor is upper quartile at +10%.

PROFITABILITY

Fluor’s return on equity has eroded very significantly since 2009.
This very significant erosion was due to very strong negative trend in pretax operating return and very small negative trend in non-operating factors.
The productivity of Fluor’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend.
Non-operating factors (income taxes and financial leverage) had a very small negative influence on return on equity.
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Fluor’s return on equity is lower quartile (-88.1%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is lower quartile (-11.6%) reflecting asset turnover that is at the upper quartile (1.96X) and lower quartile pretax margin (-5.9%).
Tax “keep” rate (income tax management) is upper quartile (150.3%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is upper quartile (5.06X).

GROWTH RATES

Overall, Fluor’s growth rate has slowed very considerably in recent years.
Fluor’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been -0.6% per year. (More recently it has been -4.9%.)

Total asset growth has been 4.4% per year. (More recently it has been -5.3%.)

Annual E.P.S. growth has been -7.5% per year. (More recently it has been -24.7%.)

Equity growth has been -1.5% per year.

Fluor’s consensus growth rate forecast (average of Wall Street analysts) is 2.3% — above the average of the historical growth measures.
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Relative to the Fluor Corp Peer Group, Fluor’s historical growth measures are generally lower quartile. Total asset growth (4.4%) has been at the lower quartile. Revenue growth (-0.6%) has been lower quartile. E.P.S. growth (-7.5%) has been lower quartile. Equity growth (-1.5%) has been lower quartile.

Consistent with this pattern, consensus growth forecast (2.3%) is also at the lower quartile.
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PRICE HISTORY

Over the full time period, Fluor’s stock price performance has been volatile and significantly below market. Between January, 2009 and November, 2019, Fluor’s stock price fell -51%; relative to the market, this was a -87% loss. Significant price move during the period: 1) June, 2019 – October, 2019: -52%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -62.1% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through October, 2019 of -62.1% is lower quartile relative to Fluor Corp Peer Group.

Current 5-year total return performance of -23.2% is lower quartile relative to the S&P 500 Composite.
Through October, 2019, with lower quartile current 5-year total return of -23.2% relative to S&P 500 Composite, Fluor’s total return performance is lower quartile relative to Fluor Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, FLR’s overall valuation is normal. The highest factor, the price/equity ratio, is lower quartile. Ratio of enterprise value/assets is lower quartile. Ratio of enterprise value/revenue is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.

Relative to Fluor Corp Peer Group, FLR’s overall valuation is normal. The highest factor, the price/equity ratio, is above median. Ratio of enterprise value/assets is lower quartile. Ratio of enterprise value/revenue is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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Fluor has a major value gap compared to the median. For FLR to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.18X to 0.47X. If FLR’s ratio of enterprise value/revenue were to rise to 0.47X, its stock price would be higher by $33 to $51.
For FLR to achieve upper quartile valuation relative to the Fluor Corp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.18X to 0.54X. If FLR’s ratio of enterprise value/revenue were to rise to 0.54X, its stock price would increase by $39 from the current level of $19.

VALUE TARGETS

FLR’s future returns on capital are forecasted to be in line with the cost of capital. Accordingly, the company is expected to be Value Creation neutral.
Fluor’s current Price Target of $23 represents a +23% change from the current price of $18.89.
This neutral appreciation potential results in an appreciation score of 54 (46% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 54, the low Power Rating of 2 results in an Value Trend Rating of F.
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Fluor’s current Price Target is $23 (-57% from the 2018 Target of $55 but +23% from the 11/11/19 price of $18.89). This dramatic fall in the Target is the result of a +0% decrease in the equity base and a -57% decrease in the price/equity multiple. The forecasted decline in return on equity has a very large negative impact on the price/equity multiple and the forecasted increase in cost of equity has no negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a slight positive impact.
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PTR’s return on equity forecast is 7.0% — below our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2014 peak of 21%.

PTR’s growth forecast is 3.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, steady decline between 2010 and 2018. The current forecast is significantly below the 2010 peak of 13%.

PTR’s cost of equity forecast is 6.7% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, variable decline between 2010 and 2018. The current forecast is below the 2014 peak of 9.5%.
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At Fluor’s current price of $18.89, investors are placing a negative value of $-28 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 2.0% per year, and a return on equity of 14.2% versus a cost of equity of 6.7%.
PTR’s 2020 Price Target of $23 is based on these forecasts and reflects an estimated value of existing assets of $23 and a value of future investments of $0.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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