WEEKLY TECHNICAL COMMENTARY: FUNDAMENTAL FEATURE

Thursday, August 21, 2008

FUNDAMENTAL FEATURE - Fluor Corp, (FLR)

Fluor Fires Up, Doubles Net Income

On Monday, August 11 after-hours, Fluor Corp. reported $209.3 million or $1.13 per share, an increase of 119%. A year earlier, FLR reported net income of $95.6 million or $0.53 per share. These results included a gain of $79 million or $0.26 per share from the sale of its joint interest in the Greater Gabbard Offshore Wind Farm. Every unit posted positive growth, while operating margins rose 6.8%. Analysts were expecting $0.82 per share, effectively beating estimates. After-hours, shares rose 6% to $81. However, on Tuesday, August 12, shares of FLR gapped up to $80.74, sold off strongly hitting a low of $67.10 before slightly recovering to close at $71.64. Shares fell $4.54 or 6%.

Operating profit doubled to $392 million, compared to $187 million in Q2 07. Revenue rose 37% to $5.77 billion up from $4.2 billion in Q2 ‘07, primarily in its oil and gas unit whose operating profit jumped 68%. Profit for the power unit jumped to $25 million and earnings rose 18% in the government segment.

New projects awarded increased by 10% to $6.4 billion. New awards in Q2 by unit: 47% - oil and gas, 38% - industrial, 11% - global services, 3% - power, and 1% - government. There continues to be strong global demand for FLR’s oil and gas projects, mining and transportation, power generation, and alternative energy. I expect further strength in the energy sector, mainly for power generation, coal plants, oil and gas, and nuclear energy. The obvious risks for FLR include, but are not limited to, a continuous drop in oil prices, labor and credit issues, and possible project delays. The recent correction in oil prices should not deter capital investment into oil and gas projects for the long-term.

On July 3, Fitch revised their long-term issuer default rating to “A-“ and giving FLR a “Positive” outlook rating from a “Stable” rating as a result of FLR’s operating performance, low leverage and improving liquidity, and a growing backlog in its oil and gas unit. FLR’s short-term issuer default rating is affirmed at “F2”. 54% of FLR’s backlog is international, with 43% coming from EAME. (Europe, Africa, Middle East), giving FLR a strong global presence.

FLR raised their full-year’s earnings forecast by $.035 to $3.65 - $3.80 per share up from $3.30 - $3.45 per share. Analysts expected earnings of $3.29 per share for the year.

Currently 16 analysts publish reports on FLR. To date, nine analysts rate FLR as a “Buy”, five rate as “Hold”, and one rates as “Sell”. There is a lot of variance between analysts, but the general consensus is “Buy/Hold” with price targets ranging from $85 to $111.

August 8 - Morgan Joseph upgraded FLR to “Buy” from “Hold” and raised their target price to $97 from $94. The firm noted that as long as oil stays above $70, energy projects can move forward.
August 8 - Morgan Keegan also upgraded FLR to “Buy” from “Hold” while setting their price target to $94.
August 11 - D.A. Davidson & Co. remained “Neutral” on FLR, reducing their price target from $95 to $85.
August 12 - Citigroup downgraded FLR to “Hold” from “Buy”.
August 12 - FBR reiterated their “Outperform” rating and raise their price target to $111 from $103.
August 12 - Lehman raised their price target to $103 from $98 noting that FLR is the only engineering & construction company that provides enough diversity across the sector’s end markets.
August 13 - UBS maintained their “Buy” rating, but reduced their price target from $107.5 to $103.
August 18 - Stanford Research upgraded FLR to “Hold” from “Buy”.

In light of positive earnings, in the past 6 months, insiders made 0 purchases and made 49 sales totaling 198,000 shares. Consider this: Alan Boeckmann, Chairman & CEO of Flour Corp., has sold approximately 127,530 shares so far in the past 6 months. Insiders may sell for a variety of reasons, business-related or not, but sales must be taken into consideration in evaluating management.

On a technical level, the response to the positive earnings report is less than appealing. The massive intra-day sell off shows that investors could not maintain the same enthusiasm as they did after-hours the day before. This is hard to believe, but the market is always right in determining price. 14.54 million shares traded on the day after earnings, its highest daily volume since May 13. The volume pattern indicates that the stock is indeed under distribution. Having broken through the 200-day MA, I expect consolidation around the $70 - $77 range. I also expect a pullback from extremely oversold levels soon. I would also watch for a 50-day/200-day MA crossover which is bearish. FLR is in a strong downtrend and the MACD & RSI also indicate a bearish trend. I suggest no trades, long or short at this level, since the risk/reward is not favorable for either.