Mad Money’s Jim Cramer discussed two high-quality infrastructure stocks: Fluor (FLR) and Jacobs Engineering (JEC).  He analyzed them from both the technical and fundamental perspective on the segment called “Off the Charts.”  Both stocks have greatly underperformed the market benchmarks in the last quarter, with both of them falling nearly 20% over the past 13 weeks.  Furthermore, both stocks have fallen over the last twelve months as well compared to the nearly 30% gains in the S&P 500.  These two stocks were supposed to be major beneficiaries of the Obama Administrations’ infrastructure stimulus plan, but thus far clearly the market has not reflected that.

Cramer sites a technician who believes that Fluor has strong support and is finished declining.  On the other hand, Jacobs Engineering is seeing significantly higher volume on the   declines than on the gains, a signal that perhaps there is more downside in store.  For an example, look at the huge volume following last week’s earnings announcement from JEC.  Based on the charts, the clear choice is Fluor.

At Ockham, we focus our analysis on fundamentals and we currently see both of these stocks as Undervalued.  Cramer argues that Fluor is the better buy of the two because it is more dependent on building projects than on maintenance projects which are JEC’s bread and butter.  That means, if you believe that the stimulus projects are coming down the pike then the growth aspect is more appealing for Fluor.  A new contract with China National Offshore (CEO) demonstrates Fluor’s international exposure, which is far more attractive than Jacobs, especially in a weak dollar scenario.  In addition, Cramer reasons that while both stocks missed Wall Street’s estimates last quarter, Fluor’s miss was less dramatic.

Although we have both stocks rated positively, we actually have to lean towards Jacobs Engineering as the more attractive valuation right now.  Cramer cites the historical price-earnings multiple of FLR as 18x, and at a current price-to-cash earnings of 9x it is very attractive.  However, he does not mention that JEC is even further out of favor with the market compared to this historical standard.  Jacobs normally trades at a price-to-cash earnings multiple of 20x, but is currently right with FLR at 9x.  Jacobs’ revenue has fallen off by a greater percentage than Fluor during the recession, but historically speaking the growth is more attractive for JEC.  That could mean that Cramer is underestimating the boost JEC will receive as the federal stimulus does start to work into the operations of these firms.  In closing, we think both are attractively priced right now, but by our methodology we have to give the slight edge to Jacobs.

Fluor Corp. (FLR) reported earnings after the closing bell on Monday, and we believe the global engineering and construction company continues to offer compelling value.  Estimates called for earnings per share of 91 cents, which would have been an increase over the same period a year ago where FLR made 87 cents.  The company beat earnings by two cents, although revenue was just a little bit light at $5.3 billion.

There are a few reasons that we think that Fluor offers attractive value to long term investors.  First, the company has shown the ability to handily beat estimates in each quarter thus far in the 21 month long recession.  Part of the reason for this is many of Fluor’s projects are signed months in advance of start date.  So, the backlog of business has helped to keep Fluor busy at a time where most businesses were dealing with declining revenue.  With more than half of Fluor’s revenue coming from projects related to oil and gas, it is impressive to see the company continue to succeed as oil has been especially volatile over the last twelve months.  The return of higher energy prices might be able to reinvigorate this side of the business, as more projects have become profitable.  The bulk of the remainder of Fluor’s revenue likely comes from infrastructure projects which will likely remain a focal point of government/stimulus spending for the next few years at least.

Also, economies around the world have shown a good deal of improvement over the last few months, and this is a welcome development for Fluor.  Obviously, if private companies and government entities are not spending capital in order to preserve their balance sheets, then there will be less demand for Fluor’s services.  If growth can indeed return soon, then Fluor will benefit from a cyclical return to more aggressive capital spending activity. 

An example of this, just today Fluor announced it had signed a contract through its Russian joint venture Sakhalin Neftegas Technology LLC to expand an onshore processing facility.  Flour has booked $700 million in the first quarter of 2009, which for a company the size of Flour is a moderate size contract.  Just last month, Fluor signed a $7 billion deal over 5 years with the U.S. Army to do infrastructure work on 74 operational bases in northern Afghanistan.  All told, the backlog rose to $30.9 billion from $29.1 last quarter.  The total backlog was 6% lower than last year, which is to be expected from cancellations in the oil and gas segment.

Fluor has done a decent job of maintaining the business even through the huge downturn in cap ex., and should stand to benefit greatly as capital spending budgets start to flow more easily.  The stock has appreciated 72% since hitting its low in early March, but we still would not consider it expensive trading at 15 times expected fiscal 2009 profit.  The stock looks appealing on a price-to-cash basis, currently trading 10.8x whereas historically a range of 12.2x to 23.6x has been normal over the last ten years.  FLR is also attractive on a price-to-sales basis, with a current price of $57.49, FLR is a full 61% below its average price-to-sales ratio at comparable revenue levels.  Given the current fundamentals we would recommending buying shares up to a price level in the high sixties.

The stock is selling off just slightly in after hours because the revenue totals didn’t match targets.  We are reaffirming our Undervalued rating on FLR after today’s earnings report.  Investor sentiment, as gauged by the Motley Fool’s CAPS survey, is positive on Fluor as well.

Fluor Corp. (FLR) is  a wonderfully diverse company that has maintained its strength as the economy has worsened over the past year.  When Fluor reported third quarter earnings last month, it beat consensus estimates for the fourth straight quarter, this time by 11%.  Revenues were $5.67 billion which narrowly missed estimates of $5.8 billion but sales grew 38.4% over last year.  In addition, the company reported records in new business booking and its highest-ever backlog of business, which prompted the company to raise full year estimates to a range of $3.70-$3.80 from previous estimate of $3.52.  It seems that no one told Fluor that we are in the midst of a full-scale global economic slowdown.

Fluor is one of the largest publicly traded engineering, procurement, construction and maintenance services companies in the world.  It has offices in 25 countries and six continents around the globe.  The company is a global force in the fields of oil and gas, chemicals, pharmaceuticals, nuclear, alternative energy, infrastructure and government projects.  Essentially, the company is a premier provider of engineering services and more than half the Fluor’s revenue (57% in 2007) comes from overseas.  The company’s international sales had been helped by a weak dollar since 2006, but the dollar’s recent appreciation relative to most other global currencies could be of some concern going forward.

In the interest of brevity, I will not go into every segment of Fluor’s business, but would be remiss if I did not cover the energy and infrastructure components.  Fluor derives half of its business from both upstream and downstream oil and gas services.  Interestingly, the sharp decline in crude oil prices has not greatly affected Fluor’s backlog of business. This is because Fluor’s clients have long term expectations for a higher price of oil instead of today’s depressed price.  According to Fluor CEO Alan Boeckmann, these capital projects are based on long term assumptions for crude to realize an average of $50 or even $60 per barrel.  So, the possibility exists that if the price of crude were to continue to fall sharply, Fluor’s upstream clients might have to pull back on capital expenditures; however, this possibility is greatly diminished by the long time horizon of these projects.

Fluor is also actively pursuing projects in alternative energy, likely to be a focal point of the incoming Obama administration.  It has been awarded a contract for the two largest polysilicon plant projects in the world from LDK Solar (LDK) in Xinyu City, Jiangxi, People’s Republic of China (link).  In addition to solar energy, the company also has been contracted to build the largest offshore wind farm from Scottish and Southern Energy (SSE) (link).

I am also very positive on Fluor’s infrastructure division and its potential for growth under the Obama administration.  I wrote about Vulcan Materials (VMC) (original here) recently as another company that would benefit from Obama’s pledged infrastructure improvements, and interestingly, just yesterday Jim Cramer made that company one of his favorite Obama plays as well (Cramer).  Well, the President elect has made promises to make infrastructure projects a top priority of his administration starting on day one, and Speaker Pelosi is already drafting the required legislation (possibly $500 billion) in preparation to hit the ground running.  Fluor could be seeing an increase in this business segment which in 2007 accounted for 20% of revenues.

Ockham rates Fluor Corp. as Undervalued since the stock has suffered a more than 50% decline over the last six months.  It is clear that many of the largest segments of Fluor’s business have not been significantly impaired by the global recession, which is quite a feat considering the extremely difficult global economic environment.  Also there could be significant gains in store for the company as a result of President elect Obama’s aforementioned policies.

Over the last ten years, Fluor stock has traded at a Price-to-Cash Flow level in the range of 11.4x to 22.4x but the stock currently trades at just 9.6x. Even more striking, the normal historical range of Price-to-Sales has been .3x to .57x but FLR is currently trading at only .16x, which is almost half the low end of this range. Were these valuation metrics to come into line with even the lower end of the historical range, we would expect to see the stock price in the low $60’s. The world will continue to need engineers and Fluor appears relatively resistant to downturns and has great potential in a growing global economy.  It is rare to find an undervalued stock in which the underlying company continues to grow earnings, raise guidance and post a record backlog of business.