Fluor’s Leaner Look Draws Wall Street’s Attention, Predictions of Improved Results

Could long-beleaguered Fluor Corp. actually turn out to be a smart investment for 1988?

The company’s decision last week to seek joint ventures with a Japanese construction firm probably doesn’t mean much yet. But it may signal management’s confidence that the Irvine-based construction and engineering giant has made a clean break after 5 years of digging out from one of the worst acquisition fiascoes in recent memory.

Fluor, with assets of roughly $2 billion, reported earnings of $26.6 million in fiscal 1987, its first profitable year since 1984. It has shed unwanted businesses and has built up a whopping $750 million cash position. And Friday, the company named a new president. Fluor has a new look, and Wall Street is taking notice.

“Last year was a turning point for Fluor,” said Mark Altman, an analyst with PaineWebber. “We’re going to see vastly improved results in 1988.” Added Kidder, Peabody’s Robert McCoy: “The worst is over for Fluor. It’s not up, up and away just yet, but you can see the light at the end of the tunnel.”

Fluor entered the tunnel back in 1981 when it purchased St. Joe Minerals for $2.2 billion because “minerals are as about as inflation-proof as you can get,” said then-Chairman Robert Fluor. Inflation-resistant maybe, but definitely not recession-proof. Commodity prices tumbled in the 1982 economic downturn and have never really recovered. In 1985, Fluor took a write-down of $410 million on its mineral holdings, resulting in a loss for the year of $633 million. It lost another $60.4 million in 1986.

Hurt by Oil Industry Troubles

The company has also been pummeled by the virtual collapse of the oil industry, which called a halt to Fluor’s once-lucrative Middle East oil construction projects. Fluor’s stock traded down from a high of $61 a share before the acquisition of St. Joe Minerals to a meager $11 in 1985.

Analysts generally agree that the company’s current chairman, David S. Tappan Jr., has largely succeeded in undoing the previous damage by getting Fluor out of the minerals business, for the most part, and by embarking on a diversification program that has left the company less reliant on oil and gas construction.

Last summer, Fluor sold off St. Joe Gold, a unit of St. Joe Minerals, for $500 million. It also bailed out of its zinc business and split up a joint-venture coal-mining operation with Shell.

And at the end of the year, Fluor readjusted its books to reflect its true asset value, lowering shareholder’s equity by $438 million.

The result of all these changes is a leaner, cleaner company. With his mission largely accomplished, analysts speculate, the 65-year-old Tappan is likely to step down in early 1989, leaving Fluor in the hands of the newly appointed president, 53-year-old Leslie McCraw. McCraw had previously served as president and CEO of Fluor Daniel, Fluor’s principal subsidiary.

Fluor stock, which closed Friday at $15.125 per share, is a good buy, according to Andrew Silver, an analyst with Donaldson, Lufkin & Jenrette. Silver estimates the company’s true value at $18 to $20 dollars a share, based on the company’s assets and Silver’s expectation of improved profitability.

Analysts project Fluor’s earnings at 50 to 75 cents per share for 1988, rising to about $2 by 1990. Paine-Webber’s Altman expects a dividend payment of about 20 cents a share in 1988. The company suspended dividends nearly a year ago to help conserve cash.

One factor that could improve Fluor’s market price is the company’s stock repurchase plan. So far, Fluor has repurchased about 1 million shares as part of a 5-million-share buyback program. Some analysts, however, believe that Fluor might repurchase as many as 25 million shares, the amount it originally issued to buy St. Joe Minerals. “That would be the final step in Fluor’s reversal,” Kidder Peabody’s McCoy said.

Management may pursue another strategy and use its cash to retire outstanding debt and refinance at lower interest rates. “Fluor’s cash gives the company tremendous flexibility in debt financing,” Silver said. Late last year, Moody’s upgraded Fluor’s credit rating.

Backlog Shows Diversification

On the construction and engineering side, Fluor’s backlog figures show the results of the company’s diversification efforts. The backlog represents all projects that the company is working on.

Five years ago, 90% of Fluor’s backlogs consisted of oil and gas business. Today, oil and gas accounts for only 20%. The balance is spread fairly evenly across industrial manufacturing, such as auto plants, and so-called “process” projects, such as pharmaceutical and biomedical plants, as well as other non-oil construction projects.

The company has also worked hard at cutting costs. Fluor’s construction businesses employed 26,000 workers in 1981. Today that number is down to 12,000. Although annual revenues have also fallen from $4.8 billion to $3.7 billion, analysts note that revenues per worker have risen. The increase in productivity is being attributed to the company’s investment in an advanced computer-aided design and drafting system.

As a result, business is picking up, and profit margins are expected to widen this year. Backlogs are up 9% over last year, while new orders are up 36%, according to Silver, the Donaldson, Lufkin & Jenrette analyst.

“What’s appealing to me about Fluor are its widening profit margins,” said Silver, who has been recommending purchases of Fluor shares since April. He estimates that profit margins will climb as high as 5% this year, contrasted with margins of less than 1% last year.

If Silver and other analysts are right, 1988 may turn out to be the fresh start that Fluor has been seeking.