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Why Fluor Corporation Soared in August

By Lee Samaha – Sep 6, 2018 at 4:49PM

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The heavy-industry-focused construction company is seeing a pickup in its end markets.

What happened

Shares in engineering and construction company Fluor Corporation (FLR 1.30%) rose 12% in August, according to data provided by S&P Global Market Intelligence.

It's not hard to see the reason behind the move: A good set of second-quarter results at the start of the month sparked the upwards trend for the rest of the month.

A miner in a hard hat looks out over a copper mine project in the mountains of Chile.

Mining projects are set to be a source of growth for Fluor. Image source: Fluor Corporation.

In a nutshell, Fluor's results reassured investors that the company was back on a growth track after a tumultuous first quarter, in which "challenges on a gas-fired power project" forced management to slash full-year earnings-per-share guidance by a dollar, to a new range of $2.10 to $2.50. The result was a 22% fall in the stock price on the day. However, the rise in August now means Fluor's stock is up by more than 10% on a year-to-date basis.

In a nutshell, the second-quarter results saw management affirm the new full-year EPS guidance, and CEO David Seaton outlined how the quarter marked the first sequential increase in backlog since 2016. To be clear, the backlog of $29.3 billion is actually down from the $37.6 billion backlog at the end of the second quarter of 2017, but it's an increase on $29.1 billion in the first quarter of 2018; hopefully, the sequential improvement will mark a trough.

Moreover, Seaton talked of being at the "very beginning" of a "long-awaited change in the cycle," and declared himself more optimistic than he had been in the previous quarter. All that is good news for investors.

So what

It's been an unusual year for the company. Investors could be forgiven for being optimistic at the start of the year: After all, Fluor is exposed to precisely the kind of mining, energy, and heavy industries that look set to rebound in 2018.

Indeed, companies like Caterpillar (CAT 1.29%) and Emerson Electric (EMR 1.48%) are seeing increased demand for their capital equipment. Emerson's process-automation orders are growing strongly as its heavy-industry customers are spending again, while Caterpillar's sales in the resource industries segment may well be in the early innings of a multiyear upcycle.

Of course, if capital equipment sales are doing well, it's likely that the same customers will sign off on major project developments in the future. That will be good news for Fluor's construction services.

Now what

Clearly, the problem with the gas-fired power project has held back profit growth in 2018, but for the first time in a few years, Fluor is seeing real growth in its underlying business. Companies like Fluor can experience sharp increases in margin and profit when end markets turn up. If Seaton is right to be optimistic, those days could come again soon enough.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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