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Fluor (FLR) Beats Q3 Earnings Estimates, Tightens '17 View

Fluor Corporation's FLR third-quarter 2017 earnings came in at 67 cents per share, beating the Zacks Consensus Estimate of 58 cents by 15.5%. The figures also reflected a massive increase from the prior-year quarter’s earnings of a meager 3 cents. Top-line expansion and improved margins drove the bottom-line growth.

Inside the Headlines

The company’s third-quarter revenues came in at $4,941.6 million, ahead of the Zacks Consensus Estimate of $4,793 million by 3.1% and moving up 3.7% year over year. Three of the company's segments recorded revenue growth, which was somewhat offset by decline in the Diversified Services segment.Growth was primarily driven by the Energy, Chemicals & Mining segment, led by the mining and metals business line as we start to execute on recent awards.

Revenues from the Energy, Chemicals and Mining segment rose 3.8% year over year to $2,412.8 million backed by increased project execution activities for certain downstream, and mining and metal projects.

Industrial, Infrastructure and Powersegment's revenues inched up 0.9% year over year to $1,138.8 million. Sales at this segment largely benefited from increased project execution activities for several life sciences and advanced manufacturing projects, which was offset to a large extent by lower levels of project execution for certain power and infrastructure projects.

Revenues at the Government segment were up 12.4% year over year to $766 million, on the back of higher project execution activities for several large multi-year decommissioning and cleanup projects.

Diversified Services revenues were down 1.3% to $624 million on a year-over-year basis. Revenue growth from the equipment business in North America was more than offset by declines resulting from the completion of certain large Stork projects in Australia.

For the reported quarter, Fluor's new awards plummeted 45.6% to $3.8 billion on a year-over-year basis. Orders at the Industrial, Infrastructure and Power segment were $628 million, while orders in the government business came in at $234 million.

Orders at the Energy, Chemicals and Mining segment totaled $2,623 million, including a copper project in Chile, and several petrochemical projects in Malaysia, the Philippines and the United States. Orders at the Diversified Services segment grossed $338 million, including new contracts to provide operation support services in Colombia, and asset integrity services in the North Sea.

Consolidated backlog at the end of the third quarter was $32.9 billion, down from $44.3 billion recorded in the year-ago quarter. The backlog erosion is attributable to exclusion of two large reimbursable nuclear projects.

Fluor Corporation Price, Consensus and EPS Surprise

Liquidity & Shares Repurchases

As of Sep 30, 2017, Fluor had cash and marketable securities (including non-current) of $2,135.7 million, up from $2,105 million as on Dec 31, 2016. Long-term debt at the end of third-quarter 2017 rose to $1,581 million from $1,517.9 million as of Dec 31, 2016.

2017 Guidance

Concurrent with the third-quarter results, the company tightened its 2017 guidance and now projects earnings per share in the range of $1.50-$1.60 compared with the previous range of $1.40-$1.70.

Our Take

After a downbeat second quarter, Fluor seems to have turned around with decent top- and bottom-line beats. However, low capital spending, intermediate softness in key end markets and continuous erosion in the backlog levels are also pressing issues for the company.

Going forward, we expect the company's margins to suffer, as it transitions from higher-margin engineering to lower-margin construction activities. Slow backlog conversion is a persistent problem in this sector. Hence, slow burn on some projects is likely to hinder this Zacks Rank #5 (Strong Sell) company's growth.

Stocks to Consider

Some better-ranked stocks in the broader construction sector include NVR, Inc. NVR, Toll Brothers Inc. TOL and KB Home KBH. While NVR sports a Zacks Rank #1 (Strong Buy), Toll Brothers and KB Home carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

KB Home registered a positive average surprise of 12.7% for the four trailing quarters, beating estimates all through.

Toll Brothers registered a remarkable positive average surprise of 8.5% for the last four quarters, driven by three consecutive beats.

NVR, Inc. has a decent earnings beat history, having surpassed estimates each time over the trailing four quarters, for an average beat of 17.2%.

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