Shares of engineering contractor Fluor (NYSE: FLR) slumped a whopping 30.2% in May, according to data provided by S&P Global Market Intelligence. There are no prizes for guessing the reason behind the tumultuous move, as the company lost a quarter of its value following a very disappointing first-quarter earnings report.
In a nutshell, Fluor is seeing a continuation of the execution problems that beset the company in 2018. By management's admission, the company was overly aggressive in bidding for certain projects in recent years, putting it in a position where it needed perfect execution in order to be profitable. Unfortunately, not all the projects went according to plan and the company has faced charge after charge, particularly with its gas-fired power projects -- an activity that Fluor is no longer bidding on.
The charges announced in the first quarter caused the company to slash its full-year EPS guidance to a range of $1.50-$2 from a previous range of $2.50-$3, and also led to the departure of David Seaton as CEO.
The question now is whether Fluor has some more nasty surprises or investors lurking in its backlog. The bears will highlight the history of poor execution and management's admission of being overly aggressive on bidding. In addition, nearly half of Fluor's backlog is in fixed-priced contracts. On the other hand, the bulls will argue that the company's growing backlog and exiting the gas-fired power business mean there's hope of improvement to come.
Investors will have to wait and see while bracing themselves for the possibility of more charges ahead, particularly as new CEO Carlos Hernandez spoke on the earnings call about "some ongoing issues with our client," which "hopefully we can resolve those on a commercial basis."
All told, don't be surprised if there's more near-term pain. It looks like things could get worse before they get better for Fluor.
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