Download - Flour (FLR) Sell
Penn State Investment AssociationIndustrial Sector
Andrew EhrlickmanJoe Gallo
Matt Anderson
The Nittany Lion Fund, LLC.
Fluor Corporation (NYSE)
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Team Recommendation: Bench
•Tough E&C Environment
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•Earnings Volatility
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•Stretched Valuation
3 •12 Month Price Target:
$78.63
•Appropriate Sell Price:
~$74.00
Top Three Reasons for Bench:
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Company Description
Introduction
Description
Key Drivers Valuation Conclusio
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► Fluor executes complex engineering, procurement, construction, and maintenance (EPCM) projects for commercial and government clients in remote and challenging locations around the world. Whether clients want to invest in new oil and gas facilities, power plants to meet global demand, or refurbishment of aging infrastructure, they call on Fluor to deliver solutions to meet their capital-investment requirements
The Nittany Lion Fund, LLC; Teva Pharmaceuticals
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Competitive Landscape
► Jacobs Engineering Co.- offer full-spectrum support to industrial, commercial, and government clients across multiple markets. Services include scientific and specialty consulting as well as all aspects of engineering and construction, and operations and maintenance
► Foster Wheeler AG - global engineering and construction contractor and power equipment supplier, with a reputation for delivering high quality, technically advanced, reliable facilities and equipment on time, on budget and with a world-class safety record
► Chicago Bridge & Iron- one of the world’s leading engineering, procurement and construction companies and a major process technology licensor. We provide a comprehensive range of solutions to customers in the energy and natural resource industries
Introduction
Description
Key Drivers Valuation Conclusio
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Revenue Breakdown
Introduction
Description
Key Drivers Valuation Conclusio
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Revenue Breakdown
Introduction
Description
Key Drivers Valuation Conclusio
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Geographic Breakdown
The Nittany Lion Fund, LLC; Teva Pharmaceuticals
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Tough E&C Environment► Most price targets are including 20x '12E
► Completely reliant on sustained high oil prices► Lower margin mining mix and pricing pressures
► Due to a competitive Middle East O&G environment and an increase in the proportion of fixed-price contracts
► Based on lower volume of awards and a tougher bidding environment in much of ‘09-‘10, Oil & Gas margins are likely to be closer to the 4Q10 levels
► External events such as natural disasters, workers’ strikes or geopolitical issues could create logistical issues at individual job sites, which could lead to project-related charges
► Negative changes in general economic factors, commodity prices, or input costs could impact demand in commodity-related sectors
► China has started buying properties in Africa, South America, Australia and elsewhere for their own consumption
► High demand for E&C companies; however China uses mostly domestic companies with the State’s backing which has prevented Fluor from expanding into the untapped Chinese market
► Additionally Chinese E&C companies are expanding to new geographic markets
The Nittany Lion Fund, LLC; Teva Pharmaceuticals
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► FLR reported weak 4th Quarter earnings► Net income declined to $117 million, $0.65 per share, from $149 million;
missing Wall Street's expectations of $0.75 per share► Revenues dropped 4% to $5.48 billion, missing estimates of $5.66 billion
► Highlights► In the Oil & Gas segment, segment profit declined 51% to $78.7M
► Segment margins of 3.8% declined 250 bps yoy► Primarily due to lower Oil & Gas and Power volumes
► $180M loss on the Greater Gabbard project offset partially by tax benefits
► FLR also reported weak 3rd Quarter Earnings► Net income declined to $38 million, ($0.30) per share, from $300 million
a year earlier; missing Wall Street’s expectations of -$0.26 per share► Revenue rose 2% to $5.5 billion, compared with $5.4 billion in the third
quarter of 2009, beating analysts’ estimates of $5.21 billion► Highlights
► The results included charges of $163 million in cost increases for the Greater Gabbard wind project
Earnings Volatility
The Nittany Lion Fund, LLC; Teva Pharmaceuticals
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► Fluor declared $343 million in costs to its 2010 results, including $180 million in Q4
► Fluor says the worst is over but we can’t rule out further delays or cost
► Weather delays, low subsea cable and turbine installation rates, and the bankruptcy of contractor Subocean have all contributed to delaying the project
► Greater Gabbard will not finish until at least the spring of 2012. The project is only 72% finished
► FLR needed to bring in new ships to replace vessels that were being supplied by Subocean
► Fluor has vowed to not proceed into another contract of this caliber but this has been devastating to bottom line
Earnings Volatility
10Introduction
Description
Key Drivers Valuation Conclusio
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Stretched Valuation► Extensive Multiple expansion since purchase on 07/09/2010 relative
outperformance of 21.67%► We believe Fluor can no long continue its multiple expansion
► Purchased at $45.27 with an original price target of $59► 4 price target updates
► Current Price of $73.56 and updated price target of $78.63► We believe there is too much positive sentiment considering slowing backlog
in 2011 thus far due to expectations of increasing in later 2011 24 analysts ratings and 0 Sells
► Above is a 2 year historical P/E► Similar charts for P/S, Forward P/E, P/B, P/FCF, EV/EBITDA,
EV/EBIT, EV/S, PEG► Please find in the appendix
11Introduction
Description
Key Drivers Valuation Conclusio
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Stretched Valuation► Although backlog is increasing to an all-time high at 34.9B at the end of
2010 we believe there is not enough capacity to win a greater amount of awards in the future
► Work performed is caped at roughly 20B per year and roughly 5B per quarter (2008-2010)
Stretched Valuation
Discounted Cash Flow (DCF)
Public Comparables
Analysts Expectations
$60 $65 $80$75$70 $85 $90
$66-$87
Current Price: $73.56
$75-$83
$68-$75
Company Risk► Volatility
► Being that E&C is only 2% of our benchmark, we are about 20% overweight in E&C with Fluor’s position
► Having such a large position in a low market cap, high beta sector with high commodity exposure has caused huge swings in our performance
(7/09/10 – 4/05/11) Weekly
► Geo-Political Risk► Prior to the Middle Eastern crisis, oil was growing due to healthy economic
situations as higher demand for oil in growing markets drove up prices which benefitted FLR’s business and stock price, but the recent turmoil and rapidly rising oil prices has effected FLR negatively
► Nigerian elections are this month threat of disruptions to Nigeria's 2.2 million barrels a day of crude output which hasn’t factored into prices yet
► "It's not on the market's radar," said Barclays Capital oil analyst Amrita Sen. (WSJ 4/04/11)
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Risk Analysis
Benchmark Risk
Sub-Sector
Geographic
Valuation
Market Cap
Company Specific
Valuation
Earnings
Volatility (Beta)
Acquisitions
Momentum
Industry Specific
Input Costs
Relative Product Innovation
Health Concerns
0 1 2 3 4 5
0 1 2 3 4 5 Notes
Reduce Sector P/E
1Yr P/E 37.15
Missed the past two quarters due to Greater Gabbard Project
Sector Risk► Deere is in the Heavy Machinery subsector
which makes up 14% of the Industrials Benchmark
► Deere is the 10th largest component of Industrials
► We have no direct exposure to the Heavy Machinery Industry
► As of now Deere would fit best as a replacement for Fluor
► Betas: DE 1.29 vs. FLR 1.53► Fluor is our most volatile holding► Deeres Correlation is higher to the S5INDU
than GWW and FLR
DE 23%
GE22%BA
20%
W.W. Grainger
18%
CSX17%
Proposed Allocation
16Introduction
Description
Key Drivers Valuation Conclusio
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FLR Comparable Analysis
17Introduction
Description
Key Drivers Valuation Conclusio
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FLR Ratio Analysis
18Introduction
Description
Key Drivers Valuation Conclusio
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FLR Five Year Summary
19Introduction
Description
Key Drivers Valuation Conclusio
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FLR Projections
The Nittany Lion Fund, LLC; Teva Pharmaceuticals
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FLR CAGRs & Trends
21Introduction
Description
Key Drivers Valuation Conclusio
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FLR Discounted Cash Flow
22Introduction
Description
Key Drivers Valuation Conclusio
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Debt and Correlation
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Team Recommendation: Bench
•Tougher Environment
1
•Earnings Risk
2
•Stretched Valuation
3 •12 Month Price Target:
$78.63
•Appropriate Sell Price:
~$74.00
Top Three Reasons for Bench:
The Nittany Lion Fund, LLC; Teva Pharmaceuticals
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Questions or Comments?
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Appendix► Price/Sales & Forward P/E
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Appendix► Price/Book & Price/Free Cash Flow
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Appendix► EV/EBIT, EV/EBITDA
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Appendix► EV/Sales & PEG
29Introduction
Description
Key Drivers Valuation Conclusio
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DE Comparable Analysis
30Introduction
Description
Key Drivers Valuation Conclusio
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DE Ratio Analysis
31Introduction
Description
Key Drivers Valuation Conclusio
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DE Five Year Summary
32Introduction
Description
Key Drivers Valuation Conclusio
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DE Projections
The Nittany Lion Fund, LLC; Teva Pharmaceuticals
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DE CAGRs & Trends
34Introduction
Description
Key Drivers Valuation Conclusio
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DE Discounted Cash Flow