A way to invest in the rotation towards value - FLUOR Corporation Investment thesis
Company: Fluor Corporation
Market Cap: $3.11 Bn
For my first blog post I wanted to share a true picks & shovels play that covers all the hot investment themes but is still under the radar & undervalued.
This is a turnaround story that covers a lot of major investment themes that should benefit from major tailwinds:
Growing investment in infrastructure Build Back Better
Exponential growth of electric vehicles - Electrification and thus need for battery chemicals
Growing demand and supply deficit in copper, Lithium, Nickel, etc.
Decarbonization - Carbon capture technology
Renaissance of nuclear energy and the upcoming uranium bull market
Small modular reactors (SMR)
The rotation from tech to value
Who is Fluor Corp?
Fluor Corp (FLR) is an industry leading engineering, procurement, construction & maintenance company recognized for the ability to successfully, ethically & safely execute projects around the world.
The business has been declining since the stock price reached its all time high of 93.28$ in May 2008. Since then the profits have been shrinking year by year.
On Nov 20th 2020 FLR announced a major re-organisation and appointment of a new CEO. The re-organization included the creation of new business units targeting specific secular trends and know how that FLR can offer.
Another relevant fact is that FLR is the majority owner of the private company NuScale which is a leading company in the emerging Small Reactor field. After a 10 year uranium bear market we are at the start of an uranium bull market. While the current reactors are here to stay and will need huge amounts of uranium supply, the awakening understanding of Nuclear as part of the clean energy mix means more institutional money will flow into this segment.
The CEO effective Jan 1st 2021 is David Constable. He has served on the Fluor board of directors since 2019 and held various leadership roles within FLR from 1982-2011. He was brought back by Executive Chairman Alan Boeckmann who himself was already retired and came back to FLR as Executive Chairman to turn around the company. He was the CEO during the years leading up to 2008 during which FLR performed very well.
The exciting thing about Fluor are the business units that were announced during the strategy day presentation. The business units that were announced are
Mining & Metals
FLR seems to be a near perfect picks and shovels play on a lot of Megatrends. I will not go over every business unit in this blog post. Instead I highlighted some of the most promising ones below one. The life sciences unit also seems very promising. More information can be found in the strategy day presentation.
Urban Solutions - Infrastructure
We know that a lot of money will flow into infrastructure projects as part of BUILD BACK BETTER: Joe Biden's jobs and economic recovery plan. Especially Texas will be a growth area judging from the industry building there and the significant amount of infrastructure projects that were announced. FLR is already contracted to work on major projects in Texas for example the "Oak Hill Parkway":
In addition, they are working on the largest energy development project (worth $32bn) in Canadian history. The project and FLR is mentioned in this Barron's Article.
Urban Solutions - Mining & Metals
The commodities and raw materials bull market is in full swing and battery metals like copper, Lithium and Nickel will be very sought after during the coming years due to the secular trend of electrification. It is not easy to find out which mining stock will be the next 10X opportunity. However, FLR works with all the major mining companies thus offers a unique picks & shovels approach to invest in this sector.
The demand for carbon capture technologies is expected to grow due to the hightened awareness of ESG factors and also the high costs through government enforced carbon fees. FLR has their own carbon capture technology and is looking for further acquisitions to grow their portfolio.
In an efficient & liquid market like the NYSE, in order to achieve outsized gains with an equity you need some unexpected catalyst to happen or something that the market is not yet factoring into the valuation, and thus the stock price.
One such optionality for FLR (and why I started to research them more) is the fact that they are the majority shareholder of the private company NuScale. Currently (To my knowledge) there is no other Small Modular Reactor (SMR) company that is publicly listed or where retail investors would have access to via other listed entities. The only equity that would come close is Rolls Royce but I doubt that the exposure to SMR would be higher than the one an investor can get through FLR.
NuScale Power has developed a new modular light water reactor nuclear power plant to supply energy for electrical generation, district heating, desalination, and other process heat applications. This groundbreaking small modular reactor (SMR) design features a fully factory-fabricated NuScale Power Module™ capable of generating 77 MW of electricity using a safer, smaller, and scalable version of pressurized water reactor technology. NuScale's scalable design—a power plant can house up to 12 individual power modules—offers the benefits of carbon-free energy and reduces the financial commitments associated with gigawatt-sized nuclear facilities.
There are also some videos on the NuScale youtube channel. Please find an example below. You will see that these new type of reactors have a very cool design and most likely will have the ability to win over nuclear sceptics based on their safety profile and better cost structure.
NuScale is not just a lab bench scale project. FLR is in active discussions with clients for SMR power plants, FLR expects to generate revenue through NuScale this year (2021) already.
In their strategy day presentation they also mentioned that being a majority owner requires FLR to expense the full quarterly expense in their P&L (even when it isn't their cash being used). This is why they announced that they aim to sell some of the equity stake. This is not bad news as they would still be a NuScale shareholder and have exclusive project rights.
SMR also need an enriched form of uranium and there are certain lead times in terms of the fuel cycle. Basically the fuel cycle starts a couple of years before the SMR is going live. Thus the accelerated growth of SMR deployments will add to the already staggering uranium supply / demand deficit.
Forward thinking people like Bill Gates are also backing nuclear power. He is an investor in another (private) SMR company called Terrapower.- Quote from one of his latest interviews "the question is, in the digital age, can you build a nuclear reactor whose economics, safety potential and waste output are utterly different than the current generation of nuclear? You really have to start from scratch.”
Due to bad performance in the past, the company currently has very high cost of revenue. This lead to the mind boggling situation that the current market cap is only 23,4 % of revenue (dated 3/28/21).
Revenue: $ 13.4 bn
Cash on hand: $ 2.1 bn
Debt: $ 6 bn
Market cap: $ 3.13 bn
The new financial targets can be seen above. FLR wants to be profitable again and aims for an EPS range of $3.00 –$3.50. In addition, they are selling an asset (Stork) which will lead to additional cash. If all of their plans come to fruition, they are currently highly undervalued and offer a realistic chance to become a multi bagger.
The market seems to agree with the story and after the March 2020 lows, it went into a continued uptrend. Recently the share price even broke a major resistance at $20.
This is not financial advise. I bought shares at a price of $17.95 (12/11/20) and $18.24 (2/1/21).
My rationale and opinion: Getting in now leaves a huge margin of safety plus room for growth. In addition, Barron's sees at least 80% upside for FLR.
Due to the high margin of safety there are not many risks. I still listed the ones I see below.
As with every operational equity there is execution risk
Maintaining their high costs of revenue
If NuScale does not lead to revenue this year but rather increases costs, that would also drag down financial results and the stock price.
Infrastructure projects could also turn out to be not as big as expected due to lower than expected Biden plan support.
Overall, as this is a turnaround play there is always the risk that the strategy does not turn out and the company stays at current levels.
Industrials & BuiltBackBetter play
Value stocks are (most likely) growing faster than tech this year
Picks & shovels play on decarbonization, raw materials & mining
Access to NuScale - SMR
Cheap valuation with high safety margin
Disclaimer: This blog post is purely my personal opinion and is not financial advice. Please do your own research before taking investment decisions. I am long FLR.