Why Is Fluor (FLR) Down 42.8% Since Last Earnings Report?

It has been about a month since the last earnings report for Fluor (FLR). Shares have lost about 42.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Fluor due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Fluor (FLR) Q2 Earnings Miss Estimates, Withdraw Guidance

Fluor Corporation reported lower-than-expected results in second-quarter 2019. Notably, it withdrew all its previously issued guidance for 2019 due to the ongoing strategic review of business and operations.

Fluor reported adjusted earnings of 33 cents per share, missing the Zacks Consensus Estimate of 50 cents by 36.5%. The reported figure also deteriorated significantly from the year-ago earnings of 81 cents per share by 59.3%.

Revenues during the quarter totaled $4.09 billion, lagging the consensus mark of $4.56 billion by 10.2% and declining 16.2% year over year. The downside was mainly caused by lower contribution from Energy & Chemicals, Government, and Diversified Services segments.

New Awards & Backlog

In the reported quarter, Fluor's total new awards of $2.4 billion dropped more than 56% on a year-over-year basis. At the end of the second quarter, consolidated backlog came in at $35.5 billion, up from $29.3 billion recorded in the year-ago period.

Segment Discussion

Energy & Chemicals segment’s revenues decreased 30.6% year over year to $1,397.1 million. During the quarter, the segment’s loss came in at $229.1 million against a profit of $97.2 million a year ago. Loss margin was 16.4% versus profit margin of 4.8% registered in the prior year.

The tepid performance was due to pre-tax charges related to late design changes, schedule-driven cost increase, client and subcontractor negotiations on two fixed-price downstream projects and scope reductions on a large upstream project. Results in the quarter were also impacted by pre-contract costs related to its continued evaluation of the probability of receiving an award and the removal of embedded foreign currency derivatives. New awards came in at $732 million, up from $493 million in the comparable period of 2018. The segment’s backlog at the end of the quarter was $15.5 billion compared with $12.4 billion a year ago.

Revenues from the Mining, Industrial, Infrastructure & Power segment totaled $1,507.6 million, up 12.9% on a year-over-year basis. The segment’s loss margin was 8.1% during the quarter against a profit margin of 3.1% a year ago, owing to agreements in principle associated with client disputes on three gas-fired power projects and forecast revisions on several fixed-price infrastructure projects. The segment booked new awards worth $510 million, significantly lower than $3,629 million a year ago. Backlog at the end of the quarter amounted to $13.5 billion compared with $12.4 billion a year ago.

Government segment reported revenues of $612 million, which declined 29.5% year over year. Loss margin from the segment came in at 36.9%, significantly up from the year-ago profit margin of 3.1%, primarily due to cost revisions for late engineering changes, rising costs and ongoing assessments of unapproved change orders on a fixed-price project for the Department of Defense, wherein Fluor is a subcontractor. The said business received new awards of $543 million in the quarter, lower than the year-ago level of $747 million. Quarter-end backlog was $3.9 billion compared with $2.3 billion a year ago.

Diversified Services revenues registered a fall of 13.3% on a year-over-year basis to $577.7 million. Segment margin contracted 350 basis points to 0.8% in the quarter. This reflect softness in the power services business and the completion of certain large projects in the equipment business. The segment’s new awards came in at $574 million, up from $513 million in the year-earlier period. Quarter-end backlog was $2.7 billion compared with $2.2 billion a year ago.

Liquidity & Share Repurchases

As of Jun 30, 2019, Fluor had cash and marketable securities of $1,930.4 million, down from $1,979.6 million at the end of 2018. Long-term debt at the end of the second quarter decreased slightly to $1,657.2 million from $1,661.6 million on Dec 31, 2018. Cash provided by operating activities was $91.4 million during the first six months of 2019 versus cash used in operations of $132.6 million a year ago.

Guidance

Due to ongoing strategic review of business and operations, the company withdrew all its previously announced earnings per share guidance for 2019. In the Energy & Chemicals segment, it expects revenues to decrease 15-20% in the second half of 2019, while operating margins are likely to improve modestly from the prior-year period.

In the Mining, Industrial, Infrastructure & Power segment, revenues are projected to grow 30-40% in the said period, backed by increased mining activities. Operating margins are expected in the 2-3% range. The Government segment’s second-half revenues are anticipated to decline approximately 5% from the second half of 2018 and operating margins will be nearly 3%, excluding NuScale. Diversified Services’ revenue growth for the said period is expected within 8-10%, whereas margins will remain nearly flat year over year.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -44.87% due to these changes.

VGM Scores

Currently, Fluor has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision looks promising. It's no surprise Fluor has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

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