FLR:NYSE

The views expressed below are those of Anchor Capital Advisors, LLC (‘‘Anchor’’) as of the date written and are subject to change at any time. They are based on our proprietary research of the stated company and the following is a summary of the primary factors that support our beliefs and rationale for investing in the company. Please see additional disclosures at the end of this publication.

FLR: NYSE

Founded by Simon Fluor in 1912, Fluor is a global engineering and construction firm that designs, builds and maintains some of the world’s most complex projects. For more than a century, Fluor has served clients in the Energy and Chemicals, Infrastructure and Power, Government, mining and metals, and advanced technologies & Life sciences sectors. Fluor ranks 181 on the Fortune 500 list and employs a workforce of more than 45,000 worldwide. [1]

Investment Thesis

In our opinion, Fluor is one of very few global players who can handle large scale, multi-billion dollar global engineering and construction (E&C) projects. Over the last few years, the E&C industry has become very competitive as projects slowed down. In fact, one of its large competitors, McDermott declared bankruptcy earlier this year. [2] But since this bankruptcy, we believe E&C companies have gained more price discipline, and many are leaving the energy space.

New management is another reason why we now like this stock. Fluor’s previous management was aggressive in building backlog and in our opinion was less prudent in risk management, however, new management is making changes. Fluor has taken some losses on a few large projects and is refocusing on risk management and fixing accounting issues. [3]Fluor owns a majority stake in Nuscale, which owns technology for smaller and safer modular nuclear reactors. The units are safer as they do not melt down even if the water supply stops and require 2/3rd less labor than current plants. [4]

Fluor stock has materially underperformed the market due to macro slowdown and company specific issues mentioned above. But with more than $1.5B cash on hand[5] and a potential to generate significant free cash flows, we believe Fluor has the balance sheet and prudent management to weather the current uncertainty. As a result, we feel that the stock should rerate significantly from its current single digit earnings multiple.

Confirmation through Research

Fluor is one of the few players that have an ability to deliver large scale complex engineering and construction projects on a global scale. [6]

Fluor delivered better than expected Q2 2020 results. Overall revenue of $4.1 billion in the quarter came in better than their implied guidance of $3.9 billion with upside mainly coming from E&C and Infrastructure and Power segments as work activities remained relatively resilient[7]

Fluor formed a special committee of independent members of the Board of Directors to complete a review on the accounting and financial reporting. Fluor has also restated financial results for 2016 to 2018 and interim periods for 2018 and 2019. Errors were identified but they were immaterial, reinforcing our view. [8]

Variant Perception

We believe Fluor stock has materially underperformed the market due to concerns about its accounting standards and ability to manage project risks. But with new management, backlog of more than $30B, strong current cash position and ability to generate free cash flow, Fluor has an ability to weather current environment and emerge stronger. We believe that market is underappreciating this significant transformation and is unwilling to look past the current issues.