TSC Ratings' Updates: Fluor

The following ratings changes were generated on Wednesday, Nov. 19.

We've downgraded Fluor(FLR Quote), which provides engineering, procurement, construction management, and project management services worldwide, from buy to hold. Strengths include its impressive record of earnings per share growth, compelling growth in net income and robust revenue growth. However, as a counter to these strengths, we also find weaknesses such as a generally disappointing performance in the stock itself and poor profit margins.

Fluor reported significant earnings per share improvement in the most recent quarter compared with the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years, which we feel should continue, suggesting improving business performance. During the past fiscal year, Fluor increased its bottom line by earning $2.92 vs. $1.48 in the prior year. This year, the market expects further improvement to $3.60. Net income increased 95.5% compared with the same quarter a year ago, from $93.68 million to $183.10 million, exceeding the average net income growth of both the S&P 500 and the construction and engineering industry.

Fluor's gross profit margin of 6.5% is extremely low, thought it has increased from the same period last year. The net profit margin of 3.2% trails the industry average. Shares are down 50.67%, underperforming the S&P 500. The fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy.