Fluor Corporation’s (FLR Quick QuoteFLR - Free Report) second-quarter 2017 earnings (excluding non-recurring costs) came in at 72 cents per share, crushing the Zacks Consensus Estimate of 59 cents by 22.0%.

However, on a reported basis, the company’s loss came in at 17 cents a share, in stark contrast to the earnings per share of 72 cents recorded in the year-ago quarter. An after-tax charge of $124 million, related to estimated cost increases on three gas-fired power projects, pushed the bottom line into the red. Also, a drab revenue performance added to Fluor’s woes.

Inside the Headlines

Second-quarter revenues came in at $4,716.1 million, falling short of the Zacks Consensus Estimate of $4,935 million by 4.4% and edging down 2.9% year over year. Two of the company’s four segments recorded revenue growth, which was more than offset by the decline recorded by the other two segments.

Revenues from the Energy, Chemicals and Mining segment declined 7.0% year over year to $2,304.0 million on account of reduced activity on Gulf Coast chemicals projects.

Industrial, Infrastructure and Power segment’s revenues inched up 1.6% year over year to $1,026.5 million. Sales at this segment largely benefited from increased project execution activities for several life sciences, advanced manufacturing and two nuclear projects for Westinghouse.

Revenues at the Government segment were up 13.1% year over year to $744.2 million, on the back of higher project execution activities for the Idaho Cleanup Project Core Contract (“Idaho Core Project”) and construction services projects.

Diversified Services revenues were down 9.9% to $641.4 million on a year-over-year basis. Completion of large Stork projects in Australia and delays in the seasonal upturn in European markets weighed down on the top-line performance of this segment.

For the reported quarter, Fluor’s new awards were down 50.3% to $3.2 billion on a year-over-year basis. Orders at the Industrial, Infrastructure and Power segment were $672 million, including the Southern Gateway highway project in Texas. The orders in the government business came in at $1,109 million, including task orders for LOGCAP IV in Afghanistan, additional funding for the Strategic Petroleum Reserve and the Idaho Cleanup Project Core Contract.

Orders at the Energy, Chemicals and Mining segment totaled $860 million. Orders at the Diversified Services segment grossed $554 million.

Consolidated backlog at the end of the quarter was $37.6 billion, down from $47.3 billion in the year-ago quarter. The backlog erosion is attributable to adjustment for a liquefied natural gas project in Canada, cancellation of a nuclear power plant project for Westinghouse and adjustment made to limit the contractual term of the Magnox nuclear decommissioning project.

Liquidity & Shares Repurchases

As of Jun 30, 2017, Fluor had cash and marketable securities (including non-current) of $2,144.9 million, up from $2,105.0 million as on Dec 31, 2016. Long-term debt at the end of second-quarter 2017 rose to $1,560.5 million from $1,517.9 million as on Dec 31, 2016.

2017 Guidance Cut

Concurrent with the second-quarter 2017 results, the company slashed its 2017 guidance for the second time in a row. The company currently projects earnings per share in the range of $1.40–$1.70 compared with the previous range of $2.25–$2.75.

The downward guidance revision is mainly attributable to charges incurred in the Industrial, Infrastructure & Power segment and the winding down of the V.C. Summer Nuclear Station project. In addition, slowdown of the pace of new awards and a waning revenue trajectory adds to the company’s grim sentiment. This apart, volatility in commodity prices is likely to play spoilsport.

Our Take

Fluor’s second-quarter results mainly took a beating on account of the pre-tax project expenses. Despite the company’s second-quarter earnings beat, precipitous decline in sales and two back-to-back guidance cuts signals tough times ahead. An unimpressive revenue trajectory is a major risk for the company. Relatively fewer award opportunities in industrial and infrastructure pose a threat to the company’s growth prospects. 

Also, 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 #4 (Sell) company’s growth.

Stocks to Consider

Some stocks in the broader sector include KB Home (KBH Quick QuoteKBH - Free Report) , NCI Building Systems, Inc. and EMCOR Group (EME Quick QuoteEME - Free Report) . While KB Home and NCI Building Systems sport a Zacks Rank #1 (Strong Buy), EMCOR Group holds a Zacks Rank #2 (Buy).

KB Home has an average positive earnings surprise of 12.5% for the past four quarters, having beaten estimates all through. You can see the complete list of today’s Zacks #1 Rank stocks here.

NCI Building has an average earnings surprise of 11.3% for the last four quarters, beating estimates thrice.

EMCOR has a decent earnings beat history, having surpassed estimates thrice over the trailing four quarters. The company has an average positive surprise of 11.7% over the same time frame.

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