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Reader Request - Fluor Corporation (NYSE:FLR)
Investment Jungle reader Don has requested that we have a look at Fluor Corporation which trades on the NYSE under the symbol FLR. Let’s have a look.
Company Profile:
From Yahoo Finance
Fluor Corporation, through its subsidiaries, provides engineering, procurement, and construction and maintenance (EPCM) services worldwide. It has five segments: Oil & Gas, Industrial & Infrastructure, Government, Global Services, and Power.
This is a large cap stock with a market capitalization of $10.07B.
Financial Analysis:
We will use our Rule #1 methodology and start by looking at the return on invested capital (ROIC). I only have 7 years worth of data, but management has been able to achieve the required 10% minimum. The 5 year average ROIC is 13.80% and last year’s ROIC was 13.70%.
Return on equity shows a 10 year average of 14% and a 5 year average of 16.44%. Last 5 years have been quite consistent at over 13%. So far so good with management.
First stumbling block is equity growth rate. Over the 10 year period, there is an average growth rate of negative 2.23%. Definitely unacceptable by Rule #1 investor standards. But if we look at each individual year, there was a very big hit in 2001 of negative 51% equity growth rate. If we look at the 5 year rate, we see 16.10%. The 3 year rate is 14.68. However, last year’s rate was a very disappointing 4.98%. Real Jekyll and Hyde going on here.
Earnings per share growth rate has been sub par over the 10 years at 3.41%. Even the 5 year rate just barely scrapes over the 10% minimum. The last two years have achieved promising growth rates of 24% and 18% respectively.
Sales growth rate once again is not up to Rule #1 investor standards with the overall average being negative 1.21%.
And cash flow growth rate is right behind as well.
From a look at the Big Five, I would not classify this as a Rule #1 business.
Stock Analysis:
Let’s see if we can calculate a sticker price for Don.
Looking at the P/E history, the 5 year average is the most conservative at 20.68. And FLR is currently running a very high P/E of 37.94.
And next comes my dilemma. What future EPS growth rate to use.Ā All Rule #1 investors use equity growth rates when determining the future EPS growth rate.Ā The 10 year average is negative. Can’t really use that one. The 5 year average is 16.10%. The 3 year average is 14.68%. And last year’s equity growth rate? A whole 4.98%. With a Rule #1 business, the future EPS growth rate should be easy to locate. But these numbers are all over the map.
The analysts have forecast 15%. That is reasonable compared to the 5 year and 3 year averages. Let’s go ahead and use that for our analysis.
With numbers in hand, the sticker price is $62.25. At close of Tuesday, the price was $114.20. That means that the stock is currently trading at an 83% premium.
See my calculations here.
Conclusion:
Well Don, the prognosis does not look good. I do not think that this is a Rule #1 business. Even using the analysts estimates, this stock seems very overvalued. Personally, I would pass on this one.
Full Disclosure: At the time of this writing, I do not own any shares in FLR.
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I just found your website and I must say, it has a lot of quality information and I love the strong fundamental analysis!
I must ask, do you have a post with a list of companies that pass all your rules?
July 5th, 2007 at 4:48 pmHi Nabloid,
Thanks for the compliment.
I am working on putting my watch list together and I hope to have it up over the next couple of weeks.
But any stock that I have analyzed on this site that was a Rule #1 business is listed in my left sidebar at the bottom.
Average Joe
July 5th, 2007 at 9:06 pmHi average joe,
July 9th, 2007 at 5:05 amyou talk about eps growth rate (for example the 5 year average 16.10 %) but maybe you mean equity growth rate?
Hi Joe,
July 9th, 2007 at 5:38 amone more question: I studied the finnish company Cramo (situation 31.12.2006: the share price 18.98, sticker price 12.63, MOS 6.32. That means that the stock was trading at an 50.3% premium (to sticker price). So I passed on this one. But what happened? Since 1.1.2006 Cramo has growing up + 101.43 %. Why’s that?
Hi Ari,
You are absolutely right. I did mean the equity growth rate. Rule #1 investors use the equity growth rate to estimate the future EPS growth rate.
Phil Town says on page 149 “the one [Big Five] that best points to future EPS growth is actually not the historical EPS growth rate, but rather historical equity growth rate.”
I am not sure I have an explanation for Cramo. The reason that a Rule #1 investor looks for a sticker price, and then the MOS price is so that we can buy a stock and still have a large margin of safety in case we calculated something incorrectly. In this case, Cramo was expensive, and just got even more expensive!
Average Joe
July 9th, 2007 at 9:28 pmHi Joe,
July 10th, 2007 at 9:19 amthanks for your answers! As to Cramo, it was expensive, but if I have not passed on it, I’d be over 100 % richer. That’s why I’m sorry for me!
Hi Average Joe,
July 12th, 2007 at 5:04 amI will appreciate, if you have a look at Nokia which trades on the NYSE under the symbol BBY and UPM (the NYSE symbol UPM). Thank you!
Pfizer (PFE) looks attractive. Would appreciate if took a look at that. Regards
July 12th, 2007 at 4:06 pmAri:
I will add Nokia to the list of stocks to analyze.
Babui:
Check here for an analysis on Pfizer.
July 12th, 2007 at 9:26 pmThanks Joe. Much appreciated. By the way - I redid my screening on S&Ps CapitalIQ for Big 5 stocks. For ROIC - I used AVERAGE for 10yr, 5yr and 1yr instead of CAGR (Compound Annual Growth Rate). Then I looked at CAGR 10, 5 and 1 for Sales, EPS, BV and FCF in that order before rounding out with a ratio of long term debt to FCF of less than 5 years. At the end of this filtering process, I was left with 10 stocks out of 22,000+. They are Valero Energy Corp (VLO), Polo Ralph Lauren (RL), Franklin Resources Inc (BEN), Techne Corp (TECH), Florida Rock Industries Inc. (FRK), Healthways Inc (HWAY), CHRobinson Worldwide (CHRW), Philadelphia Consolidated Holding Corp (PHLY), T Rowe Price Group (TROW) and Thor Industries Inc (THO).
July 13th, 2007 at 8:39 am[Note: For ROIC, SALES, EPS, BV, FCF - I used a filter of greater than 9.99%]
Regards
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February 9th, 2011 at 2:21 pm