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Fluor (FLR) to Offload Businesses, Slash Dividend by 52%

Zacks Equity Research

Fluor Corporation FLR intends to sell government and equipment businesses, as part of the company’s efforts to revamp its flagging performance. This engineering, construction and maintenance company also announced plans to slash its dividend by 52%. Fluor’s shares, which tumbled more than 67% over a year, dropped 8.5% on Sep 24 after the news.

As part of the strategic review that began in second-quarter 2019, the company evaluated the entire portfolio of businesses including Stork, COOEC-Fluor Heavy Industries and NuScale. This move will likely help the company to return to consistent profitable growth, and enable it to refocus on engineering, construction and maintenance services in core markets.

Meanwhile, the company said that Peter Fluor, who served as its director since 1984, has stepped down as chair of the company and compensation committee. He will also not stand for re-election that is to be held in April 2020.

Fluor to Return to Profitable Growth

Fluor has plans to offload its construction equipment rental company (AMECO) and the government business, and to monetize surplus real estate and non-core investments. The company expects these actions to generate in excess of $1 billion in aggregate proceeds.

Flour plans to pursue a new organizational structure and shift to a model over which business groups will have direct control over supportive operations. It expects these changes to bring overhead cost reduction of about $100 million.

Fluor added that the Infrastructure segment will focus on expansion in states where there is an established track record and strong department of transportation relationships. These states include Texas, Arizona, California, Virginia and North Carolina. Notably, the Government segment will no longer pursue fixed-price projects.

Meanwhile, its Mining, Metals and Industrial segment will continue to pursue predominantly reimbursable work, applying the revised project pursuit criteria. The Energy & Chemicals segment will only bid on lump sum projects wherein it executed the front-end engineering and design package or has the opportunity to perform sufficient diligence.

Overall, the company expects to take net restructuring charges of $150-$200 million in second-half 2019, extending into 2020.

Dividend Slashed

As part of the review, Fluor reduced its quarterly dividend to 10 cents per share from 21 cents.

Due to ongoing strategic review of business and operations, the company — during second-quarter earnings call — withdrew all its previously announced earnings per share guidance for 2019. For the Energy & Chemicals segment, it now expects revenues to decrease 15-20% in second-half 2019, while operating margins are likely to improve modestly from the prior-year period. The Government segment’s second-half revenues are anticipated to decline approximately 5% from the corresponding period of 2018 and operating margins will be nearly 3%, excluding NuScale.

The company has been facing reduced volume of project execution activities for several downstream projects and a large upstream project, and the completion of a large chemicals project. Over the past three months, the stock has lost 41.5%, underperforming the 3.4% collective decline of the stocks belonging to the industry. Further, the company’s Zacks Rank #5 (Strong Sell) reflects its innate weakness.

 

 

Stocks to Consider

Three players with solid near-term prospects in the construction space are Jacobs Engineering Group Inc. JEC, KBR, Inc. KBR and EMCOR Group, Inc. EME. All the stocks carry a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Jacobs has a three-five year expected EPS growth rate of 11%.

KBR beat the Zacks Consensus Estimate for earnings in the last four quarters, with the average being 8.7%.

EMCOR is likely to see earnings growth of 15.9% in 2019.

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