Fluor were over $14 billion. Compare this to the industry average of $8.5 billion and we can see Fluor is one of the bigger players in their market.Looking ahead to Fluor’s new awards and backlog of contracts they also look very solid with 2006 new awards at 148% and 2006 backlogs at 147%. Base year is again 2004. In a recent article from the November 1st, 2007 issue of Investor’s Business Daily entitled Capturing Market Leaders: Billion Dollar Contracts Boost Fluor’s Bottom Line it states that in “September Fluor won a contract to design and build a power plant in New Mexico with a price tag of $3 billion”.12 It’s these types of contracts that can help an investor gauge the future outlook for a solid long-term investment decision.
Overall Fluor appears to be in a very good condition for long-term success. Their low debt levels will assist in bringing in new business giving them the ability to issue new debt if needed. There is also a huge influx of new awards and backlogs that should help drive future revenues. A strong balance sheet and ample levels of cash speak to a soundly run operation that is poised for long-term growth and leadership.
Ratio Analysis In the following ratio analysis both Foster Wheeler and Fluor will be compared with their industry averages were applicable. Not all ratios reliable industry information so in those instances no industry data is presented. Foster Wheeler does not pay a dividend while Fluor does. The information below is included because it should be taken into account when determining a personal investment decision.
The current ratio is calculated by taking current assets divided by current liabilities. This measures the amount of liquid assets there are to offset current liabilities. As an investor it helps when a company has a greater current ratio because we have reassurance that current liabilities such as accounts payable and income taxes will be paid. The results of the current ratio for Foster Wheeler, Fluor, and the industry total are below. It appears that neither company is equal to or better than the industry as a whole. In 2006 Foster Wheeler finally got above 1 on this ratio when it clocked in at 1.11.
This means from 2002 to 2005 their current liabilities where greater than their current assets. Not a good situation if you want to maintain a quality investment grade for debt securitization. Fluor, on the other hand, has been on a steady trend upward from 2002 to 2006. Though Fluor is not equal to the industry they certainly do have a good ratio with plenty of reserves to pay for current liabilities.
The quick ratio is similar to the current ratio except it takes only the most liquid of assets and divides them into current liabilities. The interpretation of this ratio is very similar to the current ratio. This is just a more stringent test of liquidity and the ability to pay current liabilities. Again, this implies the financial strength of an organization. It’s important to realize that this industry is highly competitive and companies need to have the ability to finance new projects as they arise. Here we see again neither company is close to the industry norm, but Foster Wheeler appears to be very close to Fluor. Actually, most of this because we are not including contracts in process as we were in the current ratio for Fluor which make up 18% of total assets. However, Foster Wheeler has certainly improved their quick ratio from 2004 to present and is almost above 1. As stated earlier this is a direct result of the restructuring that took place in 2004.14
Working capital is derived from subtracting current assets from current liabilities. This is simply another way of looking at the current ratio and analyzing the dollar amount available to meet contingencies. This chart clearly shows the struggle that Foster Wheeler was having from 2002 to 2005 as their working capital was negative during that time. In their 10-K reports for those years there were numerous warnings given that they were concerned with their ability to secure credit for financing and here we can see why.
No one was going to loan them money because they did not have the funds to pay even their current obligations. We can also see the effects of the 2004 restructuring that took place as finally in 2006 they have a working capital figure that is positive. For Fluor they were above the industry average in 2004, but have been below in all other years. However, their working capital is solid and does not put them in a position that they would be denied financing.
Accounts Receivable Turnover This ratio measures the speed at which accounts receivable are transformed into cash. It is calculated by dividing net sales on credit by average accounts receivable. Often the longer it takes to collect on a receivable there is less likelihood it will be paid at all. Therefore, if a company can turn accounts receivable around faster than their competitor they can secure their payments with greater likelihood as well as utilize that cash to finance newer projects. This also helps to maintain a competitive edge over competitors especially when vying for a contract in the bidding process.
Here we see Fluor has a strong advantage over Foster Wheeler as well as the industry. This tells us that on average how often receivables move through the process from receipt to collection in a given year. For Fluor in 2006 this happened 16 times during the year while the industry average was 10. Foster Wheeler’s turnover was 8 during this same timeframe. Flour clearly shines on this metric and this shows they have solid operations and the ability to turn receivables into cash very quickly.16
Days’ Sales in Receivables Another measure of how receivables are turned into cash is the days’ sales in receivables ratio. This is calculated by multiplying accounts receivable by 360 and dividing that result by sales. What this tells us is how many days on average it takes to collect on a receivable. Again, the faster this can be turned around the sooner that collected cash can be used for other things including new contracts.
The trend from above continues as Fluor blows away Foster Wheeler and the industry in how many days it takes for them to collect their receivables. In 2006 it took Fluor about 22 days to collect their receivables. The industry was about 36 days while Foster Wheeler was roughly 58 days. This is the effect of efficient operations at Fluor which help them to collect their receivables in a timely fashion.
Return on Net Operating Assets
Return on Net Operating Assets is a ratio that can be used to disaggregate the operations of a company from the non-operating portions. Essentially it all boils down to a question of how the company is doing at making money in operations. This ratio is really net operating profit after tax divided by average net operating assets. The numerator is calculated by first taking sales or revenue and subtracting out all operating expenses. Next the tax rate is calculated by dividing the tax expense by pretax profit. Finally, we multiply the sales minus operating expense by one minus the tax rate. This gives us the net operating profit after tax.
To calculate the average NOA we need to go to the balance sheet and take operating assets minus operating liabilities. These are the things necessary for the company to conduct its business such as cash, A/R, inventories, A/P, property, plant, and equipment, etc. Once this is calculated the final equation for Return on Net Operating Assets is done by taking NOPAT/Average NOA. The results are below for Foster Wheeler and Fluor. There was no industry data available for this ratio so it is excluded.
It appears that Foster Wheeler had a huge edge over Fluor up until 2006. However, we need to dive into the numbers to fully understand what was going on at Foster Wheeler. Again, this calculation takes NOPAT and divides it into Average NOA. In order to end up with a high result like Foster Wheeler had in 2002 to 2005 either the numerator must have been extremely high or the denominator was unusually low.
In Foster Wheeler’s case it was the numerator that was higher. In large part this was because they had a negative Income before taxes. When this was divided into the tax number we get an enormously large number that does not make sense. Therefore we can really only use the most recent 2006 data for evaluation on Foster Wheeler. As can be seen in 2006, Foster Wheeler’s data point is very close to Fluor’s.
This again speaks to the changes that have been made at Foster Wheeler and proves their operations are improving. For Fluor they have maintained a steady range for the timeframe with a low point in 2004 of 5.11 and a high in 2005 at 7.12. This shows that for every $1 in average Net Operating Assets they were making $7.12 in Net Operating Profit after Tax. It proves they utilize their operating assets well and have a steady trend to show for it.
Dividend Payout Rate
Dividends are simply the company’s way of sharing their profits with shareholders of the stock. Fluor pays a dividend to its shareholders and the current yield as of 2006 is 1.03%. Foster Wheeler does not pay a dividend to its shareholders. I decided to include this analysis because it should be part of a personal investment decision made in either company. An important point to make is that just because a company pays a dividend does not automatically make it a good investment. Most non-dividend paying companies are growing very rapidly. They reuse their profits and reinvest them in the organization. This helps them grow even faster and hopefully the shareholders are seeing it in the stock price appreciation. However, as a long-term investor it is good to have both stock appreciation as well as a regular dividend payout.
The Dividend Payout Rate calculates the percentage of profits that were distributed out to the shareholders. In Fluor’s case there dividend payout rate for 2006 was 26.22%. This means that over 26% of the company’s profits were paid out in a dividend to the shareholders. As a comparison I looked up several competitors to Fluor such as Shaw Group, McDermott International, Chicago Bridge and Iron, and KBR.