By almost all accounts, the year ahead should be only so-so for engineering and construction outfit Fluor(NYSE: FLR). Budgets remain strained thanks to inflation, and global economic growth rates are projected to fall. Corporations, consumers, and governments alike are all still hunkering down.
Yet, Fluor stock is arguably a solid buy right now -- despite the environment -- for a couple of overlooked reasons.
A tailwind is blowing
Fluor probably didn't build the dwelling you live in. Its business is the construction of infrastructure and industrial projects. Its customers are manufacturers, power companies, refiners, and all kinds of government entities.
Just last month, chemical company Dow tapped Fluor to build an ethylene cracking complex in Alberta, Canada. And in October, Fluor announced it would be designing the world's first-ever large-scale sodium ion battery production facility. Earlier that month, Fluor's five-year contract to support the U.S. Navy's nuclear propulsion program was extended another five years.
The company doesn't seem to be having too much trouble drumming up business. Underscoring this claim is the 14% top-line growth expected for the entirety of 2023, to be followed by revenue growth of nearly 8% in 2024.
What gives? Credit the nature of Fluor's business lines, mostly. While the housing market is quite cyclical, the infrastructure engineering and construction market (for the most part) isn't. Much of its work is "have to" kinds of projects with a much bigger long-run cost of not initiating them.
To this end, Dodge Construction Network's yearly forecast calls for spending on manufacturing infrastructure within the United States to grow by 16% this year, jibing with the 15.1% growth outlook from consulting firm FMI.
Both outlooks acknowledge the recently passed CHIPS Act and Inflation Reduction Act as important drivers of this growth. And 2021's passage of the Infrastructure Investment and Jobs Act (IIJA) helps, too. These measures impact industries ranging from manufacturing to transportation infrastructure to clean energy, all of which are in Fluor's wheelhouse.
Fluor stock is undervalued and underestimated
Great, but does Fluor stock actually have any room to rise before being fully valued? It has some room, arguably more than there seems to be on the surface.
Fluor doesn't garner a great deal of analyst attention, and understandably so. Its market cap is a mere $7 billion, and it's not in a high-growth, highly followed industry. Analysts' time and focus are often better spent on bigger, more riveting companies.
Of the handful of analysts keeping tabs on Fluor, however, all of them respect it -- a few of them outright love it. On average, it's rated as a buy. The consensus price target of $45.29 is 16% above the stock's present price as well, making now a worthy entry point into the stock.
But what about the trailing price-to-earnings (P/E) ratio above 50? That's expensive by most standards and particularly pricey for stocks in slower-growth sectors. The proverbial devil, however, is in the details. The past four reported quarters include two quarters crimped by the lingering impact of the COVID-19 pandemic, the sheer scope and speed of 2022's inflation growth, and a handful of tax-related matters.
Stripping those one-time entries from its recent income statements, Fluor's actually been doing reasonably well of late. On a non-GAAP (non-generally accepted accounting principles) basis, per-share earnings for the trailing four quarters is $2.50, pulling the trailing P/E ratio down to a much more palatable 15.6.
FLR Revenue (Quarterly) data by YCharts.
Things are apt to get even better in the foreseeable future, too. The analyst community believes Fluor will report annual earnings of $2.60 per share when it posts 2023's full-year figures in February (in line with the company's own guidance), en route to $2.84 per share for fiscal 2024. That translates into a forward-looking P/E ratio of less than 14, a bargain by almost any standard.
And there's little reason to doubt the company will be able to produce a profit figure in that ballpark. Its backlog of work stood at $26 billion as of the end of September, up from the year-earlier comparison of $25.4 billion thanks to $5 billion worth of new contracts signed during the three-month stretch in question.
That said, interested investors may want to stick with this stock beyond 2024. Fluor believes the $600 billion worth of earnings before interest, taxes, depreciation, and amortization (EBITDA) expected to have been produced in 2023 will grow to somewhere between $800 billion and $950 million in 2026 as more investments in energy infrastructure and manufacturing surface. This level of EBITDA should crank per-share earnings to a range of $3.10 to $3.60, up on the order of 18% from the coming year's projected profits.
A bargain stock ready to rally
A high-growth prospect? No, Fluor's never likely to be mistaken for a growth stock. It's not a great dividend stock right now either. It stopped paying them at the onset of the COVID-19 pandemic and has yet to restart them. Even shortly before the pandemic took hold, however, Fluor cut its dividend in half. If and when it does reinstate these payments, internal support for them could be anemic.
If you're on the hunt for a bargain, though, Fluor stock is worth a look. It's been hampered by the erroneous assumption that the current economic environment doesn't suit it. But, that's a big mistake.
The current economic environment is not only not a problem for Flour, but the company's also positioned to thrive on a wave of infrastructure and industrial investments that have to be made now. Once more investors start seeing this in the coming year, don't be surprised to see Fluor stock start moving higher.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
