Fluor (FLR) Q3 Earnings: What's In Store For The Stock?

Fluor Corporation (NYSE:FLR) is set to report third-quarter 2016 results, after the closing bell on Nov 3.

In the preceding quarter, the company had let down investors by posting a negative earnings surprise of around 17.2%, marking a hat trick of negative surprises. The company has had a dismal earnings history, registering positive earnings surprise in just one of the last four quarters, resulting in a negative average surprise of 9.6%.

Let's see how things are shaping up for this announcement.

Factors to Consider

Fluor’s tepid financial performance over the past few quarters is largely attributable to the volatile commodity prices, which has been hurting companies operating in the energy domain, particularly the oil and gas sector. Precipitous decline in the prices of crude oil and certain metals have impacted the ability of Fluor’s clients to fund new projects. This has affected the company’s profitability.

A major portion of Fluor’s revenues comes from its Industrial & Infrastructure segment. The segment has been witnessing weakness for the past few quarters, owing to a decline in contributions from its mining and metals business line. Prevailing softness in the mining and metals business continue to dampen lucrative commercial opportunities for the company. We believe that this can significantlyhamper revenue growth in the thirdquarter.

We believe that deferrals in investment decisions by major clients will act as major spoilsport, marring Fluor’s third-quarter financial performance. This apart, sluggish economic growth worldwide and softness in key geographic regions arealso expected to restrict the company’s top-line growth for the soon-to-be-reported quarter. Such economic conditions are also weighing down on the company’s non-oil and gas end markets, affecting key financials.

Concurrent with its second-quarter earnings release, Fluor had narrowed its full-year 2016 guidance. The company had hinted that its revenues will continue to take a beating on account of this bleak macroeconomic scenario. Most of the revenue decline is likely to be in the second half of the year, thus signaling at a weak third quarte. This apart, intense competition in the global engineering, procurement and construction industry is also estimatedto put pressure on its contract prices and profit margins.

Despite these challenges, Fluor’s market diversity remains a key strength that helps it mitigate the cyclicality of markets in which it operates. This apart, we perceive thatFluor’s proven business model, and its “One Fluor” initiative provides it with a competitive advantage over peers. Also, a leaner operating structure, good capital stewardship, a strong backlog trend and potential for margin upside from new awards are other positives that will likely drive the third-quarter results.

Of late, the government and power business lines have proved to be the company’s strongest profit churners, offsetting the weakness in mining and petrochemical business. During second-quarter 2016, the company’s new awards surgeda striking 50.7% to $6.4 million on a year-over-year basis, mainly attributable to infrastructure and government business lines. We believe that these segments will be the major sales driver for the thirdquarter as well.Furthermore, the company’s cost-optimization efforts and strategic partnerships are also expected to supplement its key financials for the soon-to-be-reported quarter.

Earlier this year, the company revamped its business lines to better reflect the diverse end markets. Also, it completed the acquisition of Dutch engineering and construction company – Stork – to boost its integrated solutions portfolio. Buoyed by the Stork acquisition, during the last reported quarter, Maintenance, Modification & Asset Integrity revenues almost doubled on a year-over-year basis. We believe that Stork will continue to bolster revenues in the third quarter as well.

Earnings Whispers

Our proven model does not conclusively show that Flour will beat earnings in this quarter. This is because a stock needs to have both a positive Earnings ESPand a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below.

Zacks ESP: Earnings ESP for the company currently is currently pegged at 0.00%. This is because both the Zacks Consensus Estimate and the Most Accurate estimate are pegged at 87 cents. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

Zacks Rank: Fluor currently carries a Zacks Rank #4 (Sell). As it is, we caution against Sell-rated stocks (Zacks Rank #4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Casella Waste Systems Inc. (NASDAQ:CWST) with an Earnings ESP of +60% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

NN Inc. (NASDAQ:NNBR) with an Earnings ESP of +4.35% and a Zacks Rank #2.

Tetra Tech, Inc. (NASDAQ:TTEK) with an Earnings ESP of +3.39% and a Zacks Rank #2.

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