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Company: Fluor Corp (FLR)
Business: Fluor is a holding company that provides engineering, procurement, construction, fabrication and modularization, and project management services. The company’s segments include energy solutions, urban solutions and mission solutions. The energy solutions segment provides EPC services for traditional oil and gas markets, including the production and fuels, chemicals, LNG and power markets. The segment serves these industries with comprehensive project life-cycle services. The urban solutions segment provides EPC and project management services to the advanced technologies and manufacturing, life sciences, mining and metals, infrastructure industries and professional staffing services. The mission solutions segment provides high-end technical solutions to the United States and other governments. These include, among others, the Department of Energy, the Department of Defense, the Federal Emergency Management Agency and intelligence agencies. The segment also provides services to commercial nuclear clients.
Stock Market Value: $7.89 billion ($48.79 per share)
Activist: Starboard Value
Ownership: Starboard Value
Average Cost: n/a
Activist Commentary: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. They are known for their excellent diligence and for running many of the most successful campaigns. Starboard has initiated activist campaigns at 18 prior industrial companies and their average return on these situations is 50.55% versus an average of 11.73% for the Russell 2000 during the same time periods. Starboard has taken a total of 162 prior activist campaigns in their history and has an average return of 21.13% versus 14.24% for the Russell 2000 over the same period.
What’s happening
On Oct. 21, Starboard announced a nearly 5% position in Fluor and stated their intention to unlock value from the company’s ~39% holding in NuScale Power, which represents more than 60% of the company’s market capitalization, including through a potential separation.
Behind the scenes
Fluor delivers integrated engineering, procurement, construction, and project management services, spanning a diversified set of end markets. Historically, the EPCM market was a highly competitive landscape that led to heavy risk taking, where growth was often prioritized over discipline and profitability. For Fluor, as well as much of the industry, this led to management aggressively increasing their backlog of higher-risk lump-sum and guaranteed minimum contracts, leading to execution risks, thin margins and cost overruns. Ultimately, this industry-wide shift caused many companies to scale back their construction efforts or even enter bankruptcy, and Fluor was no exception, with the company’s share price falling below $4 in March 2020.
However, this started to change when the company appointed David Constable as CEO at the start of 2021. Under his leadership, Fluor immediately pivoted to lower-risk reimbursable projects, growing from 45% of its backlog to 80%, while exposure to loss-making legacy projects have declined from $1.8 billion to $558 million today, materially reducing its risk profile.
Additionally, while largely associated with legacy energy projects, the company has levered into faster growing markets within its urban solutions segment, now 73% of its backlog compared to 37% in fiscal year 2021. As a result, even with this derisking effort, Fluor was still able to maintain a steady backlog and achieve meaningful EBITDA growth, a 14% compound annual growth rate from fiscal year 2021 to fiscal 2024, with analysts projecting a ~9% CAGR from fiscal 2024 to fiscal 2028.
With many of the large construction and EPCM players having exited the market, Fluor’s operational turnaround has allowed it to come out the other side of this turmoil on top, now operating in a duopoly of global end-to-end EPCM players with Bechtel, while the construction market has grown rapidly, now over $918 billion.
As a result of this successful operational overhaul, the market currently values Fluor at 8.9 time its enterprise value to calendar year 2027 estimates for consensus EBITDA, in between its EPCM (13x) and legacy construction peers (6x). So, Fluor appears to be a great business with a great management team operating in a duopoly in a growing industry that is fairly valued with a $6.7 billion enterprise value. However, Fluor also owns a 39% stake in NuScale, a publicly traded small modular nuclear reactor company.
Fluor invested in NuScale more than a decade ago, and its $30 million early investment played a pivotal in NuScale becoming the first U.S.-listed SMR company, and the only company of its kind with U.S. Nuclear Reactor Commission design approval.
As global power demand continues to rise, particularly alongside the data center boom, nuclear generation will be vital, and SMRs will play an essential role in providing energy to meet this growth. As a result, Fluor’s investment in NuScale has been highly lucrative – valued at approximately $4.3 billion ($3.4 billion post tax). That’s more than half Fluor’s current enterprise value.
If you were to back out the NuScale stake from Fluor’s valuation, then Fluor’s enterprise value would drop to $3.3 billion, implying an extremely depressed discount of just 4.6x, with peers trading from 6 to 13 times.
Starboard has amassed a nearly 5% position in Fluor and is urging management to unlock the value from its NuScale holdings. Starboard believes that Fluor has multiple paths to monetize its remaining NuScale stake. These options include simply selling their position through open-market sales, an exchange offer or a mandatory exchangeable bond, with proceeds potentially funding a large share buyback, which would be highly accretive to Fluor’s EPS, especially at its currently depressed valuation.
Alternatively, Starboard has proposed a tax-free spinoff of Fluor’s NuScale position, which could trigger a similar rerating of the core business while providing Fluor shareholders with the option to retain their exposure to NuScale’s long-term potential.
Thus, assuming Fluor maintains an 8.9x EBITDA multiple, which still could be improved upon given its discount to EPCM peers, the rerating that could come from this separation could yield over 200% of upside.
Starboard is a very experienced activist and also has a history in this industry. In June 2019, Starboard engaged another construction player, AECOM, where over the ensuing multiyear engagement, AECOM refreshed its board, appointed a new CEO, exited self-perform construction, and divested management services. This became one of Starboard’s most lucrative engagements in its history, returning 147% over its 13D filling versus 26% for the Russell 2000.
But more importantly, this is when they met David Constable for the first time. Constable is the executive chairman of Fluor, and until February, was its CEO. So, we expect that the mutual respect between Starboard and Constable will be conducive to an amicable, constructive relationship and beneficial to shareholders.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist investments.