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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Fluor Corp

December 2nd 2014 Fluor
NYSE Symbol: FLR
Industry: Industrial
Price as of 12/1: $60.25

The abbreviated trading session on Friday saw plenty of action thanks to one word, oil. The price of crude oil fell 6% to $69.00 a barrel, a four and a half year low, after OPEC decided to maintain output at 30 million barrels per day. The energy sector dropped 6.0% on Friday and 9% for the full week while the airliners flew higher breaking out to new all-time highs. As much as we'd like to think the decision by OPEC to maintain the supply of oil was a decision to punish the Russians and Iranians, Goldman Sachs believes the decision was to target the oil and gas fracking companies in our own country. Keeping prices low for a number of months will put pressure on the weaker oil fracking producers out West to cut production. Recent oil fracking highflyer, Continental Resources fell 20% on Friday, down 50% since September. OPEC's next major decision will come in January or February. Until then, the price of oil may remain under pressure along with energy stocks. The recent selling pressure has brought back valuations. A number of blue chip oil companies are trading for less than 10 times earnings, but the earnings estimates have yet to come down. In the short term it's best to go with the blue chip oil related companies that can weather this price weakness. This week we'll highlight a blue chip largest global infrastructure engineering firms highlighted in Barron's over the weekend. The stock of the week is Fluor. Fluor is a well-diversified Industrial company that gets 55% of its sales from oil and gas projects. The stock is down 25% for the year, now trading at a year and a half low. Fluor and the oil sector may remain under pressure in the short term, but long term the sector is very attractive compared to the broader market which is trading at all-time highs.

Fluor is a turnkey operator that builds everything from ethylene refinery crackers and natural gas liquefaction plants to the new span that will replace the Tappan Zee Bridge across the Hudson River in New York State. The stock is down 26% from its high this year lowering the market cap to just $9.7 billion. The third quarter earnings didn't help things as revenue fell even as continuing operations rose 10% from the year-ago period. On the bright side, Fluor has a robust backlog and balance sheet with expected double-digit percentage earnings per share growth over the next two years. At the third quarter's end on Sept. 30, Fluor's backlog was $42.3 billion, up 5% from the previous quarter and 16% from the year-earlier period. This backlog will give Fluor plenty of earnings visibility in the next two to three years which has long term Institutional money managers taking a hard look at Fluor and the oil related sector. Fluor's business is diverse geographically, with about half in the U.S. and Canada, and the rest overseas. Fluor's projects are huge infrastructure projects, with customers that think long term so the company's fundamentals are not exposed to short term fluctuations in oil. Another Fluor attraction is that some 80% of its business is "cost plus," that is, it is allowed to pass along higher costs to customers which helps keep margins up and mitigates risk.

Currently, Fluor is trading for 0.4 times sales, 2.6 times book value, and 12.6 times reduced earnings estimates. The company has only $526 million in debt with $2 billion in cash or $11.50 a share in net cash. With so much cash, the company has the potential to buy back 10% of the outstanding shares which could really boost the stock when the price of oil rebounds. In the Barron's article, one money manager has a $90 to $100 price target in the next three to five years. Another money manager has an $80 price target in the next 24 months. These price targets would generate over 10% returns over the next several years. In the short run, oil and energy related stocks like Fluor should remain under pressure, but long term the stock has a compelling valuation in a market trading at all-time highs.