Fluor (FLR) Hit By Escalating Costs And Dearth Of Projects

The year 2017 continues to be a drab one for Fluor Corporation (NYSE:FLR) , which has been grappling with a host of issues for a couple of years now. During the second quarter of 2017, the multinational engineering and construction firm, which has been witnessing precipitous decline in sales, slashed its 2017 guidance for the second time in a row.

Over the past six months, Fluor’s shares have lost 31.9%, steeper than the industry’s average decline of 16.2%. Also, the company’s earnings estimates have moved south in the past couple of months, which indicates bearish analyst sentiment for the stock. The Zacks Consensus Estimate for full-year 2017 earnings went from $2.40 to $1.48 over the past 60 days, on the back of six downward estimate revisions versus none upward.

Given its array of problems, we believe Flour’s investors are in for a bumpier ride. Let’s take a deeper look at the headwinds, which has significantly thwarted the company’s growth drive.

Factors Weighing Down

Fluor has been facing a dearth of engineering and new awards which has hurt its growth prospects significantly. Currently, the company’s margins are under pressure as it is transitioning from higher margin engineering to lower margin construction activities, particularly related to Energy & Chemicals and Mining segment. This migration is a result of the natural maturing of EPC projects as well as the low level of new awards over the past several quarters.

This is also the most prominent reason which causes year-over-year variance in results. In addition, slow burn on a couple of key projects and absence of new awards at a reasonable pace are making matters worse for the company. Fluor has been witnessing continious backlog erosion over the past few quarters. At the end of the second quarter of 2017, consolidated backlog stood at $37.6 billion, down from $47.3 billion in the year-ago quarter.

Fluor has been facing a host of issues in its major projects in the Industrial, Infrastructure & Power segment, which has proven to be a drag on its top line. For instance, cost of three of its gas-fired projects has not met original baseline assumptions due to improper estimating. Fluor is currently assessing whether the opportunities for return in the power market are consistent with its expectations.

Furthermore, the Zacks Rank #5 (Strong Sell) company faces intense competition in the global engineering, procurement and construction industry, which can pressurize its contract prices and profit margins. In addition, the increasing competition, coupled with the inclination toward globalization, has triggered a trend of consolidation across all industries especially in the engineering and construction sector.

We believe prolonged softness in end markets, absence of any significant awards and executional challenges will keep the stock from making a comeback anytime soon.

Key Picks

Some stocks in the broader sector include KB Home (NYSE:KBH) , TopBuild Corp. (NYSE:BLD) and EMCOR Group (NYSE:EME) . While KB Home and TopBuild sport a Zacks Rank #1 (Strong Buy), EMCOR Group holds a Zacks Rank #2 (Buy).

KB Home has an average positive earnings surprise of 12.5% for the past four quarters, having beaten estimates all through. You can see the complete list of today’s Zacks #1 Rank stocks here.

TopBuild has a positive average earnings surprise of 10.4% for the last four quarters, having beaten estimates each time.

EMCOR has a decent earnings beat history, having surpassed estimates thrice over the trailing four quarters. The company has an average positive surprise of 11.7% over the same time frame.

One Simple Trading Idea

Since 1988, the Zacks system has more than doubled the S&P 500 with an average gain of +25% per year. With compounding, rebalancing, and exclusive of fees, it can turn thousands into millions of dollars.

This proven stock-picking system is grounded on a single big idea that can be fortune shaping and life changing. You can apply it to your portfolio starting today.

Learn more >>