Fluor Earnings: Raising Fair Value Estimate on Higher Outlook and Improved Execution

We’ve increased our fair value estimate for Fluor FLR to $36 from $33 after the engineering and construction firm posted strong second-quarter results and raised its guidance for full-year 2023. Management now anticipates revenue growth of 10%-15% (up from 10%), adjusted EBITDA of $500 million-$600 million (up from $450 million-$600 million), and adjusted EPS of $2.00-$2.30 (up from $1.50-$1.90). The fair value adjustment reflects the improved near-term revenue growth outlook and our slightly more optimistic midcycle margin assumption.

Fluor grew its second-quarter revenue by roughly 20% from the prior-year period, with double-digit growth across all three segments: 29% in energy solutions, 20% in urban solutions, and 29% in mission solutions. All three core segments posted a positive segment profit. Fluor ended the quarter with a $25.5 billion backlog, a significant increase from $19.5 billion in the prior-year period, which we think positions the firm well to maintain its strong momentum. The prospect pipeline remains healthy, as the company has recently completed or is currently working on front-end engineering and design and study packages totaling roughly $300 billion.

New awards in the second quarter were $3.7 billion, and management said on the earnings call that margins on new awards were around 200 basis points above the total backlog margin. Furthermore, we expect Fluor’s risk profile to continue improving as 70% of the new awards were reimbursable. The firm has now reduced its fixed-price exposure to 36%, compared with 59% at the end of 2021, and management aims to reduce it further to 25% by 2024. As Fluor continues its strategic transformation, we expect the firm to generate higher margins and deliver more stable results.