Jim Breuer Will Expand Into Data Centers But Legacy Issues May Impact Future Earnings

Key Takeaways

• Strategic focus on diversified growth and risk management through increased reliance on reimbursable contracts is expected to stabilize and improve net margins.
  
• Expansion in sectors like pharmaceuticals and data centers and a share repurchase program are likely to elevate revenue, margins, and earnings per share.
  
• Challenges in backlog, project execution, and potential liabilities could strain Fluor's financials and pressure margins and net earnings.

Catalysts

Provides engineering, procurement, and construction (EPC); fabrication and modularization; and project management services worldwide.

• The transition to a new CEO, Jim Breuer, with a focus on developing Fluor's next strategic phase grow and execute, including revised growth targets and a focus on project delivery, is expected to drive revenue growth and improve margins.
  
• The significant increase in backlogs for Urban Solutions, exemplified by a 20% yearly growth, and a robust slate of future opportunities in pharmaceuticals, semiconductors, and data centers are likely to bolster Fluor's revenue and elevate net margins.
  
• The inclination toward reimbursable contracts, accounting for 85% of new awards in 2024, aligns with the company's strategy to stabilize and improve net margins by reducing risk exposure to fixed-price contracts.
  
• Opportunities in the power sector, including nuclear and thermal energy, to support growing data center energy demands promise a potential increase in long-term earnings and support sustained growth in revenue.
  
• Fluor's share repurchase program, with $125 million already repurchased in Q4 2024 and an additional $300 million targeted for 2025, is anticipated to enhance earnings per share by reducing the number of shares outstanding.

Fluor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fluor's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.1% today to 2.8% in 3 years time.
• Analysts expect earnings to reach $582.6 million (and earnings per share of $3.44) by about March 2028, down from $2.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.1x on those 2028 earnings, up from 2.9x today. This future PE is lower than the current PE for the US Construction industry at 24.1x.
• Analysts expect the number of shares outstanding to decline by 1.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.63%, as per the Simply Wall St company report.

Fluor Future Earnings Per Share Growth

Risks

• The energy solutions segment reported a decrease in its ending backlog, dropping from $9.7 billion to $7.6 billion year-over-year. This signals potential future revenue challenges as the backlog is an important indicator of future work and revenue.
  
• Ongoing challenges at the LNG Canada project, such as issues with insulation work, may impact project delivery and profitability, potentially affecting net margins due to increased costs and potential penalties for delays.
  
• The company faces risks related to an unresolved jury verdict requiring a $116 million provision, which could create unexpected financial liabilities affecting net earnings.
  
• There is a significant dependency on reimbursable projects (around 80% of the backlog), which, while reducing risk, can also result in lower margins compared to lump-sum contracts, impacting net profit margins.
  
• The company acknowledges a potential need for up to $200 million in funding for late-stage legacy projects in 2025, which could strain cash flow and impact net earnings negatively.

Valuation

• The analysts have a consensus price target of $52.5 for Fluor based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.0, and the most bearish reporting a price target of just $40.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $20.6 billion, earnings will come to $582.6 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 7.6%.
• Given the current share price of $37.2, the analyst price target of $52.5 is 29.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.