Fluor (FLR) the World’s Largest Engineering Company a BUY

Fluor (FLR) is one of the world’s largest engineering, procurement and construction companies.

What I Like about FLR

I think FLR is way undervalued is a strong buy opportunity leading into 2010. I project for FLR to have improved revenue growth heading into the New Year with new orders picking up due to favorable market trends. I also foresee FLR benefiting from increased activity overseas. In China alone, there is a $600 billion infrastructure stimulus to improve the facilities across the country. This kind of stimulus adds great value to FLR, as since they are the world’s largest engineering company, they will be able to secure a large portion of those contracts. I also think we will see increased activity in the U.S. With unemployment crisis looming, infrastructure projects can be a quick fix. It is calculated that every billion spent on constructing highways, etc creates over 28,000 jobs. This sounds like a number Obama will like to hear making him more likely to pledge more stimulus dollars. Moving on I expect demand to increase in 2010 backed by more oil and gas projects, government spending worldwide on construction projects. We saw construction spending increase 27% in September alone. Anyone who still has caution about the growth prospects, FLR has over $31 billion in future project backlogs adding value if the economic crisis were to continue longer than expected. Adding more value FLR has a strong balance sheet with a solid ROA, strong profit margins, and little debt. With effective costs cuts to be implemented in the New Year these numbers should only continue to improve. Adding to this I think PE ratios and earnings estimates will improve in the New Year. In 2009, earnings dropped due to the large amount of cancellations as a result of the credit crunch. With banks getting healthy and more willing to lend we can expect for infrastructure projects to start up again.

Why Construction and Engineering will be a Bullish Sector?

In 2010, I foresee the sluggish global economy picking up its pace and an increase in spending on capital projects. In my opinion, China will continue to spend billions on infrastructure to maintain their world dominance. I foresee the Middle East, Africa, and Eastern Europe to pledge billions to the construction of infrastructure projects to energize growth in their developing regions. Finally, I believe Brazil will lead resurgence in capital spending across the board in Latin America as they prepare for the 2016 Olympics. In 2009, construction equipment orders have kept stable and have continued to increase due to the large amount of global infrastructure demand. I have no reason to believe that this would not continue to increase throughout 2010. To better the situation, I believe that credit conditions should lighten up allowing for a large amount of delayed construction projects to begin operations again. With recent increases in oil and gas prices, I expect us to see a gradual rebound in oil and gas projects as well. I also anticipate the U.S. to increase its capital spending for highways, tunnels and bridges in 2010 aided by Obama’s $787 billion economic stimulus package and federal/local spending. Going against these predictions are theories that the global markets will continue to struggle. I disagree, for one we have seen great strides recently in the improved economic forecast. As for the sector itself, most major oil companies have already increased capital spending plans as oil is back over $80 a barrel. In the New Year, I expect capital markets to lighten up allowing more lending to take place. Building off this, acquisitions activity should increase as companies have access to lower borrowing rates and attractive multiples. Overall, we are seeing a resurgence in capital projects, which helps the markets across the board as demand for commodities, and resources will increase.

Overall

I like Fluor (FLR) due to its strong balance sheet, large growth prospects overseas, and extensive contract backlog. I think it will continue to prosper throughout the year and heading into 2010 as economic times improve. With FLR trading at around $44.25 I would recommend buying it all the way up to $48 with a 12-month target price of $65.

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