Fluor May Be a Bet Despite Fact That Stock Has Lagged
When the 1990s began, Irvine-based Fluor Corp. had the look of a “sure thing” on Wall Street. A premier stock for this decade, some folks called it. You couldn’t find many companies with a more bullish outlook.
Fluor’s major market--plant design and construction for oil companies, manufacturers, utilities and other large firms worldwide--was emerging from a long drought. New contracts were pouring into Fluor, and its global reach in the engineering field gave it a huge advantage over many smaller competitors.
And though the company’s stock price had rocketed from $11 in 1987 to $42.75 by February, 1990, many investors had visions of the stock quickly topping the old peak of $71 set during Fluor’s previous heyday, in 1980.
It didn’t happen. Two years later, the stock is at $42.875. The price has been higher and lower in the interim, but basically a long-term investor who bought two years ago has gained nothing.
Fluor stands out as a handy case study for individual investors today, because the sins committed with (and against) this stock are being repeated with innumerable other stocks in the current wild market. That creates both hazards and opportunities.
Boiled down to the basics, Fluor’s image with investors has gone from one extreme to another: Two years ago, investors were way too excited about the firm and overpaid for the stock. Then earnings didn’t grow as expected, because of a few nagging little problems. Now, Wall Street is so focused on its disappointment with Fluor that it’s short-changing the stock--though Fluor’s return on equity was 17.2% in 1991, and its long-term outlook remains excellent.
Its stock notwithstanding, Fluor certainly looks like a better company now than two years ago. In 1989, Fluor posted revenue of $6.3 billion. Last year, revenue was $6.7 billion. In the same period, operating earnings have risen from $207 million to $223 million, and per-share profit has jumped from $1.35 to $1.83, excluding one-time items.
Those numbers are good, but they should have been better--except that a war and a recession got in the way.
The irony, though, is that even with the dramatic changes in the world political and economic scene since 1989, Fluor’s core engineering and construction business has continued to boom. Despite the weak business environment, many companies continue to push ahead with plans to build new plants or renovate older ones--from oil refineries to chemical production facilities to electric power plants.
This is what Fluor does best, and its success at landing work on such megaprojects around the globe shows up in its order backlog: now $11.2 billion, up dramatically from $8.4 billion in 1989.
So why haven’t earnings kept pace? Engineering and construction account for 86% of Fluor’s revenue, but the balance comes from two low-tech businesses that Wall Street wishes weren’t part of the mix: Coal mining (11% of revenue) and lead production (3%). In a weak economy, those two cyclical businesses are a drag on earnings.
“Wall Street would like them to get rid of coal and lead,” says Richard Sweetnam, an analyst at Kidder, Peabody & Co. Yet to sell now would be silly, he admits. Fluor’s coal is mostly the low-sulfur variety, which is going to be in increasing demand as clean-air laws force more electric utilities and industrial plants to switch to cleaner fuels by 1995, Sweetnam notes.
Lead, meanwhile, was a money-loser last year for Fluor. But the majority of the company’s lead goes into auto batteries. If and when an auto sales recovery arrives, the lead business is likely to be remarkably profitable--as it was in 1989, when it produced $39 million in operating profit for Fluor.
In its 1991 annual report released last month, Fluor spends three pages on the topic of “shareholder value.” Despite Wall Street’s mood swings over the company and its stock, Fluor insists that it’s very serious about driving its stock price higher over time--by building the business, keeping costs under control, and investing future earnings in intelligent ways.
For an investor who bought the stock two years ago--and who still doesn’t have a profit--the question isn’t so much where Fluor has gone wrong, but how long Fluor needs to prove to Wall Street that its business plan is the right one. This is still a company whose earnings power by the mid-1990s could top $4 a share. If investors were too excited about Fluor two years ago, then today the mistake seems to be that they’re unmoved by what remains a very good long-term story.
Two Years With Fluor Long-term investors who bought shares in engineering giant Fluor Corp. two years ago figured the stock would be a lot higher by now. Instead, they’re barely even. End-of-the-month prices on NYSE, except latest February 1990: $42.75 Tuesday close: $42.875
