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Why Fluor Corporation Slumped in October

By Lee Samaha – Nov 5, 2018 at 12:53PM

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Another disappointing quarter, but another quarter of backlog progression -- the crazy world of being a Fluor Corporation shareholder in 2018.

What happened

Shares in engineering and construction company Fluor Corporation (FLR 2.56%) fell a whopping 24.5% in October, according to data provided by S&P Global Market Intelligence. The decline marks a volatile period in a yo-yo year for the stock. Somehow, Fluor stock is up 1% on a year-over-year basis, but it's been anything but a calm year for the company.

Going back to the first-quarter results in May, the company missed earnings estimates and slashed its full-year earnings-per-share (EPS)  guidance to $2.10-$2.50 from a previous range of $3.10-$3.50, largely due to "challenges on a gas-fired power project." Fast-forward to the summer, and Fluor's second-quarter results saw the company steady the ship and affirm full-year guidance while generating a sequential improvement in its backlog -- the stock rose 12% in August

A polypropylene production complex in Russia.

Fluor Corp provides project management services for heavy industries. Image source: Fluor Corporation.

The damage in October was done by the preannouncement (on Oct. 10)  that Fluor would miss third-quarter revenue and earnings estimates due to "expected pre-tax charges of $46 million relating to close out efforts on a downstream project in Europe and $35 million for forecast revisions on a gas-fired power project," according to the company's press release.

The results have subsequently been released and caused yet another cut in full-year 2018 diluted EPS guidance to $1.80-$1.90.

FLR Chart

FLR data by YCharts

So what

The execution challenges have soured what was supposed to be a year of recovery for Fluor Corporation. For the first time in a few years, some of the end markets the company has heavy exposure to -- mining, energy, and heavy industries -- are seeing a return to capital spending, but as you can see above, Fluor isn't taking full advantage.

It's a pity, because the company reported $9.6 billion worth of new awards in the quarter, including $5.4 billion in mining, industrial, infrastructure, and power, $3.3 billion in government, and $644 million in energy and chemicals -- for reference, analysts expect Fluor's sales to be around $19 billion in 2018.

Meanwhile, the backlog increased to $34.9 billion from $29.3 billion in the previous quarter and $32.9 billion a year ago. Fluor's end markets are definitely picking up.

Now what

Fluor's execution difficulties have eroded confidence in the company's ability to pull profit from a pickup in its key end markets, and investors need to see a few quarters of solid execution before feeling completely comfortable with the stock.

Management is holding an investor day on Nov. 16; it's promised to give color on the outlook for 2019 and will hopefully indicate a blemish-free fourth quarter as well.

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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