Summary
- Fluor Industries has seen its share price decline by more than 50% over the last year.
- Excessive risk taking is the main cause for Fluor's current problems.
- Management has been replaced last May and the old CEO and CFO have returned to help Fluor implement better risk management and turnaround the company.
- Asset sales of more than $1 billion will strengthen the balance sheet.
- A cash flow and sum of the parts valuation show that Fluor has at least 150% upside over the next two to three years.
Fluor (FLR) is one of the world's largest publicly-traded engineering, procurement, construction (EPC) and maintenance companies. Fluor works with Clients in diverse industries around the world to design, construct and maintain their capital projects (company website). The company started in 1912 and has grown dramatically since then. As an EPC company it is involved in a wide array of building projects. From building bridges, highways and rails to pipelines and refineries Fluor does it all. While during most of its operating history Fluor has been very successful, it has recently stumbled.
In this article I will argue that this fall was justified initially. However, recent developments have been very positive and will likely put Fluor on the right path again. The current price ensures investors have a solid margin of safety and a lot of upside potential.
The big stumble
From the great recession till the end of 2018 Fluor's stock price saw little upside movement with the stock selling on average for around $50-60 dollars. During this period, it seemed like business as usual. The company was steadily executing big projects that generated substantial free cash flow. With that money the company paid a modest dividend and bought back substantial amounts of shares. Everything looked okay until in 2018 more and more problems started to surface, all seemingly caused by one overarching problem:
Excessive risk taking
One of the most important things for a company like Fluor is its risk assessment when taking on a project. With projects sometimes worth many billions of dollars and Fluor being responsible for most, if not all, of the design and construction, bad risk management can result in big losses for the company. It seems that at least the last couple of years Fluor's risk management under its former CEO David Seaton has declined. The third and fourth quarter of 2018 started to include non-recurrent charges for some projects. Around 80 million in Q3 of 2018 and 70 million in Q4 of 2018. This was not yet dramatic, but the hammer dropped in Q1 of 2019.
In that quarter the company posted an unexpected loss again made worse by charges for certain projects. CEO David Seaton stepped down and guidance was cut from $2.50-3.00 a share given at the end of fiscal 2018 to 1.50-2.00 a share during the Q1 earnings release. Everything in the Q1 2019 earnings release pointed towards Fluor having some big problems. They appointed former CEO Alan Boeckmann, who led Fluor from 2002 till 2011, as the new chairman and they appointed Carlos Hernandez, hired under Boeckmann in 2007, as the new CEO. This move was the first major indication the problems for Fluor were big enough that they needed old insiders to restructure and stabilize the company.
After this Q1 earnings report Fluor's stock dropped to around $30 a share. Subsequently to this report FLR also brought back its old CFO, Mike Steuert, in the same role. These old insiders had the tough task of quickly looking into Fluor's problems and how to fix them. After assessing the damage of former management Fluor posted a loss of almost $4 a share in Q2. The company took restructuring charges of more than $700 million and it withdrew guidance altogether. Fluor's stock dropped to below $20 and has stayed there for now.
I belief this was a not an overreaction from investors since this was the first indication of how bad the former management had messed up. Something Boeckmann and Hernandez acknowledged in the earnings call. They were both upfront and honest about Fluor's problems, flagging failed risk management in the past as Fluor's major issue.
