Monday, March 23, 2009

Flour (NYSE:FLR): Downgraded to Underperform at Merrill Lynch/BAM

Merrill Lynch/BAM throws another jab at Flour (NYSE:FLR) downgrading the stock to Underperform from Neutral while lowering their tgt to $29 from $43.

Despite a selloff in the stock, they think there’s an additional downside into ’09 as the company’s
outlook and consensus expectations remain too optimistic in firm's view. Their detailed industry capex analysis published today show that commodity-related capital spending (>60% of FLR’s revenue) is forecast to be one of the weakest in ’09, dropping double digits. BAS-ML Oil & Gas team forecasts a 20% decline in the sector’s capex, which supports Merrill's forecast of FLR’s backlog dropping ~25% in ’09. FLR’s outlook of flat backlog is based on its optimistic stance on the M. East/Asia/Russia. But their channel checks and recent $14bn Al-Zour refinery cancellation (resulting in FLR removing $2bn of backlog or 6% of total) support their expectations of capex slowdown in the region.

Margins likely to be under pressure through the downturn
Firm thinks that the E&C companies are likely to become more aggressive in bidding on pricing and contract structure to keep up utilization of its employees, which will likely result in margin erosion going into ’10. In their view, this is a particularly large risk for FLR due to its focus on large discrete projects, which is still not reflected in consensus estimates and the stock price in their view. Merrill is trimming their ’10 EPS on margin from $2.50 to $2.40, which remains the low on the Street.

Notablecalls: So now the Merrill/BAM E&C analyst joins the ranks of other tier-1 firms rating the stock as a Sell. Makes you think they all can't be wrong, eh? FLR sure has proven to be a resilient one but I do suspect Merrill's call may be the straw that finally breaks the camel's back.

With the futures pointing toward a strong gap up, I'm sure you can get some pretty decent fills early on. So make sure you don't overpay.

No comments: