Fluor [NYSE:FLR] March 31, 2009 close: $34.55
52-week range: $28.50 (Nov. 21, 2008) - $101.36 (Jun. 23, 2008)
The current configuration of Fluor was established in January 2002 after the spin-off of Massey Energy. Fluor is a global provider of professional services in engineering and construction, procurement, project management, maintenance and operations. 2008 revenues hit a new record high at $22.326 billion up 33% from $16.691 billion in 2007.
Last year’s revenue surge was fueled by energy-based capital spending as oil prices spiked in the first half. Profits rose 50% as margins expanded. This year is likely to show much more subdued growth with the cooling off of the energy sector. Consensus views for 2009 are now running between $3.55 and $3.76 – still enough to set a new all-time EPS record. 2010 estimates assume a dip from there to about $3.00 - $3.43 depending on economic conditions and oil price movements.
Regardless, Fluor shares look very cheap at just 9.7x this year’s lower end expectations. The lowest average annual P/E since Fluor took on its current structure was 15.3x during the severe bear market of 2002.
The company had $1.834 billion in cash as of year end 2008 against only $151 million in total debt (debt = < 1% of total capital). Value Line rates Fluor’s financial strength an ‘A++’, their highest ranking.
FLR shares have dropped from an all-time high of $101.36 in June 2008 to just $34.55 right now as investors worry about possible project cancellations that would reduce their backlog. I believe that this likelihood is already priced in to these high-quality shares.
Here are the outstanding per share numbers for the past few years as reported by Value Line:
Year ..…. Sales …..… C/F ……. EPS ….… B/V …..… Div…….. Avg. P/E
2002 ….. 61.34 …… 1.53 …… 1.07….… 5.44 …… 0.32 ….. 15.3x
2003 ….. 53.63 …… 1.58 …… 1.12 …… 6.59 …… 0.32 …….15.5x
2004 ….. 54.82 …… 1.58 …… 1.08 …… 7.81 …… 0.32 …...20.1 x
2005 ….. 75.56 …… 1.90 …… 1.31 …… 9.36.…… 0.32 …… 23.2x
2006 ….. 79.95 …….2.21 …… 1.48 …….9.83 .... 0.40 …….28.8x
2007 ….. 94.11 …….3.14 …… 2.25 ……12.82 ……0.40 …….25.6x
2008 …..125.67…….4.40 …… 3.37 ……14.71 ……0.50 …….19.9x
Value Line notes Fluor’s stock’s ‘price growth persistence’ and ‘earnings predictability’ come in at the 80th and 70th percentiles respectively (with 100th being best). Fluor’s current yield is a better than average (for them) 1.45% and it represents a payout ratio of just 14.8% of last year’s EPS.
You can see how cheap the shares are now offered when you compare back to the historical multiples in the table above. Even a return to a lower than typical 15 multiple would bring FLR shares back to $53.25 before year end. That would make for a 54% gain in less than 9 months.
If you’re less sanguine on the near term due to market or economic conditions…
Here’s a nice, quite conservative play on FLR:
…………………………....................……….….Cash Outlay ……...........……. Cash Inflow
Buy 1000 FLR @ $34.55 ……...........…….. $34,550
Sell 10 Jan 2010 $35 calls @$7.90 ……………….......................………….. $7,900
Sell 10 Jan 2010 $35 puts @$8.40 ………….....................………………... $8,400
Net Cash Out-of-Pocket ……...........……… $18,250
On expiration date- January 16, 2010:
If FLR shares are $35 or higher (plus $0.45 or up 1.3% from today’s close):
Your $35 calls will be exercised.
You will sell your shares for $35,000.
Your $35 puts will expire worthless (a good thing for you as a seller).
You will have no further option obligations.
You will hold $35,000 cash for your original outlay of $18,250.
That’s a best case scenario return of 91.7% cash-on-cash on a stock that only needed to rise by 1.3% or more from inception of the trade.
What’s the risk?
If FLR stays under $35:
Your $35 calls will expire worthless.
Your $35 puts will be exercised.
You will be forced to buy an additional 1000 shares of FLR and
put up another $35,000 in cash.
You will end up owning 2000 shares of FLR.
What’s the break-even on this whole trade?
On the original shares it’s their purchase price of $34.55 less the $7.90
per share call premium = $26.65 /share.
On the second 1000 shares it’s the $35 strike price less the $8.40
per share put premium = $26.60 /share.
Your break-even point is the average of $26.65 + $26.60 = $26.63 /share.
That’s $7.92 or 22.9% below your starting price of $34.55.
At $26.63 the forward P/E of FLR would be 7.5x this year’s projected earnings. That $26.63 break-even price is lower than the lowest trade on FLR since early 2005 when EPS were $1.31 versus the $3.37 actually reported in 2008. Even in last November’s panic sell-off these shares never got below $28.60. The dead lows in 2006 and 2007 were $36.80 and $37.60.
You will make money on this trade if the shares:
Go up.
Stay unchanged.
Go down less than 22.9% by January 16, 2010.
Disclosure: Author is long FLR shares and short FLR options.
52-week range: $28.50 (Nov. 21, 2008) - $101.36 (Jun. 23, 2008)
The current configuration of Fluor was established in January 2002 after the spin-off of Massey Energy. Fluor is a global provider of professional services in engineering and construction, procurement, project management, maintenance and operations. 2008 revenues hit a new record high at $22.326 billion up 33% from $16.691 billion in 2007.
Last year’s revenue surge was fueled by energy-based capital spending as oil prices spiked in the first half. Profits rose 50% as margins expanded. This year is likely to show much more subdued growth with the cooling off of the energy sector. Consensus views for 2009 are now running between $3.55 and $3.76 – still enough to set a new all-time EPS record. 2010 estimates assume a dip from there to about $3.00 - $3.43 depending on economic conditions and oil price movements.
Regardless, Fluor shares look very cheap at just 9.7x this year’s lower end expectations. The lowest average annual P/E since Fluor took on its current structure was 15.3x during the severe bear market of 2002.
The company had $1.834 billion in cash as of year end 2008 against only $151 million in total debt (debt = < 1% of total capital). Value Line rates Fluor’s financial strength an ‘A++’, their highest ranking.
FLR shares have dropped from an all-time high of $101.36 in June 2008 to just $34.55 right now as investors worry about possible project cancellations that would reduce their backlog. I believe that this likelihood is already priced in to these high-quality shares.
Here are the outstanding per share numbers for the past few years as reported by Value Line:
Year ..…. Sales …..… C/F ……. EPS ….… B/V …..… Div…….. Avg. P/E
2002 ….. 61.34 …… 1.53 …… 1.07….… 5.44 …… 0.32 ….. 15.3x
2003 ….. 53.63 …… 1.58 …… 1.12 …… 6.59 …… 0.32 …….15.5x
2004 ….. 54.82 …… 1.58 …… 1.08 …… 7.81 …… 0.32 …...20.1 x
2005 ….. 75.56 …… 1.90 …… 1.31 …… 9.36.…… 0.32 …… 23.2x
2006 ….. 79.95 …….2.21 …… 1.48 …….9.83 .... 0.40 …….28.8x
2007 ….. 94.11 …….3.14 …… 2.25 ……12.82 ……0.40 …….25.6x
2008 …..125.67…….4.40 …… 3.37 ……14.71 ……0.50 …….19.9x
Value Line notes Fluor’s stock’s ‘price growth persistence’ and ‘earnings predictability’ come in at the 80th and 70th percentiles respectively (with 100th being best). Fluor’s current yield is a better than average (for them) 1.45% and it represents a payout ratio of just 14.8% of last year’s EPS.
You can see how cheap the shares are now offered when you compare back to the historical multiples in the table above. Even a return to a lower than typical 15 multiple would bring FLR shares back to $53.25 before year end. That would make for a 54% gain in less than 9 months.
If you’re less sanguine on the near term due to market or economic conditions…
Here’s a nice, quite conservative play on FLR:
…………………………....................……….….Cash Outlay ……...........……. Cash Inflow
Buy 1000 FLR @ $34.55 ……...........…….. $34,550
Sell 10 Jan 2010 $35 calls @$7.90 ……………….......................………….. $7,900
Sell 10 Jan 2010 $35 puts @$8.40 ………….....................………………... $8,400
Net Cash Out-of-Pocket ……...........……… $18,250
On expiration date- January 16, 2010:
If FLR shares are $35 or higher (plus $0.45 or up 1.3% from today’s close):
Your $35 calls will be exercised.
You will sell your shares for $35,000.
Your $35 puts will expire worthless (a good thing for you as a seller).
You will have no further option obligations.
You will hold $35,000 cash for your original outlay of $18,250.
That’s a best case scenario return of 91.7% cash-on-cash on a stock that only needed to rise by 1.3% or more from inception of the trade.
What’s the risk?
If FLR stays under $35:
Your $35 calls will expire worthless.
Your $35 puts will be exercised.
You will be forced to buy an additional 1000 shares of FLR and
put up another $35,000 in cash.
You will end up owning 2000 shares of FLR.
What’s the break-even on this whole trade?
On the original shares it’s their purchase price of $34.55 less the $7.90
per share call premium = $26.65 /share.
On the second 1000 shares it’s the $35 strike price less the $8.40
per share put premium = $26.60 /share.
Your break-even point is the average of $26.65 + $26.60 = $26.63 /share.
That’s $7.92 or 22.9% below your starting price of $34.55.
At $26.63 the forward P/E of FLR would be 7.5x this year’s projected earnings. That $26.63 break-even price is lower than the lowest trade on FLR since early 2005 when EPS were $1.31 versus the $3.37 actually reported in 2008. Even in last November’s panic sell-off these shares never got below $28.60. The dead lows in 2006 and 2007 were $36.80 and $37.60.
You will make money on this trade if the shares:
Go up.
Stay unchanged.
Go down less than 22.9% by January 16, 2010.
Disclosure: Author is long FLR shares and short FLR options.
