Will Macroeconomic Woes Continue to Plague Fluor (FLR)?
Macroeconomic conditions, especially prolonged volatility in oil and gas prices, have significantly thwarted growth of companies operating in the energy domain, particularly the oil and gas sector. One such engineering and construction behemoth – Fluor Corporation FLR – has been persistently grappling with these headwinds, despite its diligent restructuring initiatives and industry-leading franchise within the U.S.
In the past six months, the company’s shares recorded an average return of 4.9%, way below the Zacks categorized Engineering/R&D Services industry average of 18.8%.
Factors Causing the Slowdown
Precipitous decline in the prices of crude oil and certain metals have affected the ability of Fluor’s clients to fund new projects. Since Apr 2015, the company has been witnessing a downward movement in the prices of crude oil and certain metals, which, in turn, has marred its profitability. The company’s segments, including Energy, Chemicals, Mining and Maintenance Modification Asset Integrity have been hurt on account of these challenges.
Lower commodity prices continue to impact cash flow of Fluor’s customers, affecting their ability to fund new projects. In such circumstances, it is most likely that these clients will maintain a cautious approach while taking investment decisions, adding to the company’s woes. This apart, sluggish economic growth worldwide and softness in key geographic regions are also posing challenges. Further, the company’s non-oil and gas end markets are bearing the brunt of this slowdown.
A major portion of Fluor’s revenues are derived from its Industrial & Infrastructure segment. Prevailing softness in the mining and metals business continues to dampen lucrative commercial opportunities for the company, as most mining customers have deferred major capital investment decisions. The segment has been witnessing weakness for the past few quarters, owing to a decline in contributions from its mining and metals business line.
Moreover, relatively fewer award opportunities in Industrial and Infrastructure segments pose a threat to the company’s growth prospects. Sluggish backlog conversion problem is a persistent crisis in this sector, mainly fueled by conditions in the current cycle. This implies that the company’s backlog level cannot be regarded as a reliable indicator of earnings growth. Also, Fluor’s unimpressive revenue trajectory is thwarting its bottom-line performance.
In light of the lingering softness in the Energy, Chemicals and Mining segment, Fluor has revised its full-year 2016 guidance downward. Currently, the company projects earnings per share for 2016 in the range of $2.20–$2.40, compared with the earlier guided range of $3.25–$3.50 per share. We believe that most of the company’s opportunities in Infrastructure, Industrial and Government segments will continue to be offset by weak commodity business.
Estimate Revisions Bleak
Fluor has a dull earnings surprise history, with average earnings miss of 3.6%, missing estimates thrice over the trailing four quarters. Moreover, the company has been faring poorly on the estimate revision front as analysts have become increasingly bearish on the stock over the past couple of months. With seven downward revisions compared with no upward revision in the past two months, the Zacks Consensus Estimate for 2016 earnings has declined from $3.26 to $2.30.
Zacks Rank and Key Picks
Fluor currently has a Zacks Rank #4 (Sell). Better-ranked stocks in the broader sector include II-VI Incorporated IIVI, Applied Industrial Technologies Inc. AIT and The Middleby Corporation MIDD.
While II-VI Incorporated sports a Zacks Rank #1 (Strong Buy), Applied Industrial and Middleby Corporation carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
II-VI Incorporated has registered a remarkable positive average surprise of over 39.8% in the four trailing quarters, driven by four strong consecutive beats.
Applied Industrial Technologies has managed to beat estimates twice in the trailing four quarters and has a positive earnings surprise of 4.9%.
Middleby Corporation beat earnings in each of the trailing four quarters, resulting in an average surprise of 15.9%.
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