Fluor Corporation FLR has been facing mounting challenges that raise concerns about its near-term performance and strategic direction. Recently, the company noticed tepidness in its Energy Solutions business, which compelled it to reduce earnings and EBITDA guidance for the year.
Despite efforts to streamline its operations and diversify its portfolio, the company’s persistent execution issues, foreign currency risks, and project delays diminish its attractiveness.
Although FLR’s shares have outperformed the Zacks Engineering - R and D Services industry in the past three months, earnings estimates for 2024 have moved down in the past 30 days. This reflects investors’ concern about the company’s growth potential.
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Notably, in the same time frame, the stock has underperformed its peers, such as Sterling Infrastructure, Inc. STRL, Quanta Services, Inc. PWR and AECOM ACM.
Let’s delve deeper into the factors hurting this operation and maintenance services provider.
Tepid Q3 Results Implicate Reduced Guidance
In third-quarter 2024, Fluor’s earnings declined 50% from the prior year with lower-than-expected contributions from the Energy Solutions segment. The segment margin was decreased to 2.9% from 7% in the year-ago period. Owing to this, the company has reduced its 2024 earnings and EBITDA guidance.
Fluor now expects adjusted earnings per share (EPS) in the range of $2.55-$2.75 (mid-point $2.65) from the prior expectation of $2.50-$3.00 (mid-point $2.75). The expected range is below the 2023 reported figure of $2.73.
The company has also lowered its adjusted EBITDA guidance to $525-$575 million from $625-$675 million expected earlier. The guidance reflects the timing of revenue and cancelation of certain projects. In 2023, the company reported adjusted EBITDA of $613 million.
The Zacks Consensus Estimate for 2024 EPS is currently pegged at $2.62, indicating a decline of 4% year over year.
Project Delays & Cancelations Signal Execution Weakness
Fluor’s growth story is undermined by significant project delays and cancelations. Fluor recently witnessed the cancelation of a large semiconductor manufacturing project in the United States, which significantly affected its Advanced Technologies and Life Sciences segment. Also, delayed revenue recognition in its Energy Solutions segment and cost overruns in Mexico highlight execution risks. A significant portion of future growth is tied to projects that are either delayed or dependent on favorable regulatory and market conditions.
Meanwhile, Fluor has made progress in reducing its exposure to legacy projects, but the remaining backlog of $859 million across five projects poses ongoing risks. The limited backlog conversion into EPC awards and muted margins restrict immediate upside potential.
Weak Margins & Currency Challenges Persist
Margins in the Energy Solutions segment were weaker in the third quarter due to lower-than-expected contributions from projects nearing completion. The effective tax rate also increased due to higher revenues in high-tax jurisdictions like Mexico and Canada, adding to financial strain.
Foreign currency volatility continues to create unpredictability in earnings, with embedded derivative gains being one-off benefits rather than sustainable contributions.
Final Call
Fluor’s persistent execution issues, weak financial performance, and dependence on uncertain growth drivers like NuScale and energy transition projects paint a concerning picture. While the company has made strides in diversifying its portfolio, its near-term outlook is marred by operational inefficiencies and financial pressures.
The lack of clear growth catalysts and ongoing execution challenges make this Zacks Rank #5 (Strong Sell) company a high-risk investment in a volatile market.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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