Fluor Has Power in a Recession

By Ned Douthat from OckhamResearch on Covestor.com

Fluor (FLR Quote) is a diverse company that has maintained its strength as the economy has worsened over the past year.

When Fluor reported third-quarter earnings last month, it beat consensus estimates for the fourth straight quarter, this time by 11%. Revenue was $5.67 billion, which narrowly missed estimates of $5.8 billion but sales grew 38.4% over last year.

In addition, the company reported records in new business booking and its highest-ever backlog of business, which prompted it to raise full-year estimates to a range of $3.70-$3.80 from previous estimates of $3.52. It seems that no one told Fluor that we are in the midst of a full-scale global economic slowdown.

Fluor is one of the largest publicly traded engineering, procurement, construction and maintenance services companies in the world. It has offices in 25 countries and six continents around the globe.

The company is a global force in the fields of oil and gas, chemicals, pharmaceuticals, nuclear, alternative energy, infrastructure and government projects. Essentially, the company is a premier provider of engineering services and more than half the Fluor's revenue (57% in 2007) comes from overseas.

The company's international sales had been helped by a weak dollar since 2006, but the dollar's recent appreciation relative to most other global currencies could be of some concern going forward.

In the interest of brevity, I will not go into every segment of Fluor's business, but would be remiss if I did not cover the energy and infrastructure components. Fluor derives half of its business from both upstream and downstream oil and gas services.

Interestingly, the sharp decline in crude oil prices has not greatly affected Fluor's backlog of business. This is because Fluor's clients have long-term expectations for a higher price of oil instead of today's depressed price. According to Fluor CEO Alan Boeckmann, these capital projects are based on long-term assumptions for crude to realize an average of $50 or even $60 per barrel.

So, the possibility exists that if the price of crude were to continue to fall sharply, Fluor's upstream clients might have to pull back on capital expenditures; however, this possibility is greatly diminished by the long-term horizon of these projects.