Flour (FLR) Sell

Penn State Investment AssociationIndustrial Sector

Andrew EhrlickmanJoe Gallo

Matt Anderson

The Nittany Lion Fund, LLC.

Fluor Corporation (NYSE)

2

Team Recommendation: Bench

•Tough E&C Environment

1

•Earnings Volatility

2

•Stretched Valuation

3 •12 Month Price Target:

$78.63

•Appropriate Sell Price:

~$74.00

Top Three Reasons for Bench:

3

Company Description

Introduction

Description

Key Drivers Valuation Conclusio

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► Fluor executes complex engineering, procurement, construction, and maintenance (EPCM) projects for commercial and government clients in remote and challenging locations around the world. Whether clients want to invest in new oil and gas facilities, power plants to meet global demand, or refurbishment of aging infrastructure, they call on Fluor to deliver solutions to meet their capital-investment requirements

The Nittany Lion Fund, LLC; Teva Pharmaceuticals

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Competitive Landscape

► Jacobs Engineering Co.- offer full-spectrum support to industrial, commercial, and government clients across multiple markets. Services include scientific and specialty consulting as well as all aspects of engineering and construction, and operations and maintenance

► Foster Wheeler AG - global engineering and construction contractor and power equipment supplier, with a reputation for delivering high quality, technically advanced, reliable facilities and equipment on time, on budget and with a world-class safety record

► Chicago Bridge & Iron- one of the world’s leading engineering, procurement and construction companies and a major process technology licensor. We provide a comprehensive range of solutions to customers in the energy and natural resource industries

Introduction

Description


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Revenue Breakdown

Introduction

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Revenue Breakdown

Introduction

Description


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Geographic Breakdown


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Tough E&C Environment► Most price targets are including 20x '12E

► Completely reliant on sustained high oil prices► Lower margin mining mix and pricing pressures

► Due to a competitive Middle East O&G environment and an increase in the proportion of fixed-price contracts

► Based on lower volume of awards and a tougher bidding environment in much of ‘09-‘10, Oil & Gas margins are likely to be closer to the 4Q10 levels

► External events such as natural disasters, workers’ strikes or geopolitical issues could create logistical issues at individual job sites, which could lead to project-related charges

► Negative changes in general economic factors, commodity prices, or input costs could impact demand in commodity-related sectors

► China has started buying properties in Africa, South America, Australia and elsewhere for their own consumption

► High demand for E&C companies; however China uses mostly domestic companies with the State’s backing which has prevented Fluor from expanding into the untapped Chinese market

► Additionally Chinese E&C companies are expanding to new geographic markets


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► FLR reported weak 4th Quarter earnings► Net income declined to $117 million, $0.65 per share, from $149 million;

missing Wall Street's expectations of $0.75 per share► Revenues dropped 4% to $5.48 billion, missing estimates of $5.66 billion

► Highlights► In the Oil & Gas segment, segment profit declined 51% to $78.7M

► Segment margins of 3.8% declined 250 bps yoy► Primarily due to lower Oil & Gas and Power volumes

► $180M loss on the Greater Gabbard project offset partially by tax benefits

► FLR also reported weak 3rd Quarter Earnings► Net income declined to $38 million, ($0.30) per share, from $300 million

a year earlier; missing Wall Street’s expectations of -$0.26 per share► Revenue rose 2% to $5.5 billion, compared with $5.4 billion in the third

quarter of 2009, beating analysts’ estimates of $5.21 billion► Highlights

► The results included charges of $163 million in cost increases for the Greater Gabbard wind project

Earnings Volatility


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► Fluor declared $343 million in costs to its 2010 results, including $180 million in Q4

► Fluor says the worst is over but we can’t rule out further delays or cost

► Weather delays, low subsea cable and turbine installation rates, and the bankruptcy of contractor Subocean have all contributed to delaying the project

► Greater Gabbard will not finish until at least the spring of 2012. The project is only 72% finished

► FLR needed to bring in new ships to replace vessels that were being supplied by Subocean

► Fluor has vowed to not proceed into another contract of this caliber but this has been devastating to bottom line

Earnings Volatility

10Introduction

Description


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Stretched Valuation► Extensive Multiple expansion since purchase on 07/09/2010 relative

outperformance of 21.67%► We believe Fluor can no long continue its multiple expansion

► Purchased at $45.27 with an original price target of $59► 4 price target updates

► Current Price of $73.56 and updated price target of $78.63► We believe there is too much positive sentiment considering slowing backlog

in 2011 thus far due to expectations of increasing in later 2011 24 analysts ratings and 0 Sells

► Above is a 2 year historical P/E► Similar charts for P/S, Forward P/E, P/B, P/FCF, EV/EBITDA,

EV/EBIT, EV/S, PEG► Please find in the appendix

11Introduction

Description


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Stretched Valuation► Although backlog is increasing to an all-time high at 34.9B at the end of

2010 we believe there is not enough capacity to win a greater amount of awards in the future

► Work performed is caped at roughly 20B per year and roughly 5B per quarter (2008-2010)

Stretched Valuation

Discounted Cash Flow (DCF)

Public Comparables

Analysts Expectations

$60 $65 $80$75$70 $85 $90

$66-$87

Current Price: $73.56

$75-$83

$68-$75

Company Risk► Volatility

► Being that E&C is only 2% of our benchmark, we are about 20% overweight in E&C with Fluor’s position

► Having such a large position in a low market cap, high beta sector with high commodity exposure has caused huge swings in our performance

(7/09/10 – 4/05/11) Weekly

► Geo-Political Risk► Prior to the Middle Eastern crisis, oil was growing due to healthy economic

situations as higher demand for oil in growing markets drove up prices which benefitted FLR’s business and stock price, but the recent turmoil and rapidly rising oil prices has effected FLR negatively

► Nigerian elections are this month threat of disruptions to Nigeria's 2.2 million barrels a day of crude output which hasn’t factored into prices yet

► "It's not on the market's radar," said Barclays Capital oil analyst Amrita Sen. (WSJ 4/04/11)

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Risk Analysis

Benchmark Risk

Sub-Sector

Geographic

Valuation

Market Cap

Company Specific

Valuation

Earnings

Volatility (Beta)

Acquisitions

Momentum

Industry Specific

Input Costs

Relative Product Innovation

Health Concerns

0 1 2 3 4 5

0 1 2 3 4 5 Notes

Reduce Sector P/E

1Yr P/E 37.15

Missed the past two quarters due to Greater Gabbard Project

Sector Risk► Deere is in the Heavy Machinery subsector

which makes up 14% of the Industrials Benchmark

► Deere is the 10th largest component of Industrials

► We have no direct exposure to the Heavy Machinery Industry

► As of now Deere would fit best as a replacement for Fluor

► Betas: DE 1.29 vs. FLR 1.53► Fluor is our most volatile holding► Deeres Correlation is higher to the S5INDU

than GWW and FLR

DE 23%

GE22%BA

20%

W.W. Grainger

18%

CSX17%

Proposed Allocation

16Introduction

Description


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FLR Comparable Analysis

17Introduction

Description


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FLR Ratio Analysis

18Introduction

Description


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FLR Five Year Summary

19Introduction

Description


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FLR Projections


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FLR CAGRs & Trends

21Introduction

Description


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FLR Discounted Cash Flow

22Introduction

Description


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Debt and Correlation

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Team Recommendation: Bench

•Tougher Environment

1

•Earnings Risk

2

•Stretched Valuation

3 •12 Month Price Target:

$78.63

•Appropriate Sell Price:

~$74.00

Top Three Reasons for Bench:


24

Questions or Comments?

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Appendix► Price/Sales & Forward P/E

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Appendix► Price/Book & Price/Free Cash Flow

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Appendix► EV/EBIT, EV/EBITDA

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Appendix► EV/Sales & PEG

29Introduction

Description


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DE Comparable Analysis

30Introduction

Description


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DE Ratio Analysis

31Introduction

Description


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DE Five Year Summary

32Introduction

Description


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DE Projections


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DE CAGRs & Trends

34Introduction

Description


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DE Discounted Cash Flow

Documents

Flour (FLR) Sell