Winning Picks Premium Trade Idea #562

  For Educational Purposes Only  

August 30, 2022

Trade Idea: FLR $27.32 (Fluor Corp)

Buy January 20^th $30 Calls $2.40

I saw 10,000 call spreads bought in Fluor (FLR) last week, which piqued my interest.

• First, it doesn’t trade that much.
• Second, it’s a company involved in infrastructure building, particularly in the energy sector.
• And third, the chart looked interesting.

Under further investigation, FLR looks really interesting.

Nuclear Energy

I found out from the Earnings Call and their Annual Report that FLR is a majority owner of NuScale (SMR), a small nuclear energy company that is on fire, up 50% in the last 6 weeks!

From the FLR 2021 Annual Report:

In December 2021, we announced that NuScale, in which we are the majority investor, signed a merger agreement with Spring Valley Acquisition Corp., a special purpose acquisition company ("Spring Valley"). Spring Valley is acquiring an approximately 20% interest in NuScale. The proposed transaction is anticipated to close in the first half of 2022, subject to customary closing conditions. Upon completion of the merger, we estimate that we will own approximately 60-70% of the combined company and expect that we will continue to consolidate it.

From the Earnings Call Slides:

FLR vs SMR Size

FLR’s market capitalization is only $3.88BN, with a rock solid balance sheet as well. The company has $2Bn in Cash with $1Bn in Long-term debt.

So, I was surprised to see they own 57% of a company with a market capitalization of $3.22Bn, valued at $1.83Bn.

A Timeline of Events

Digging in a little more, I saw that NuScale merged with a company back in December, 2021. the deal closed in May.

May 3^rd - NuScale and Spring Valley Acquisition Corp deal closes. Click Here

Right after the deal closed two FLR directors came in to buy more than $1.75mm worth of stock in the open market.

May 10^th – Director James Hackett buys 30,000 for $25.46.
May 12^th – Director Matthew Rose buys 40,000 for $25.63.

Then on the August 5^th Earnings Call, we see these statements from the CEO and CFO:

Chairman and CEO David Constable made these comments in his opening statements:

We continue to see tremendous support and interest in NuScale since its SMR listing in early May. After investing in NuScale for over 10 years and as NuScale's largest investor, it's encouraging to see that the market agrees that there is significant value in NuScale and their carbon free Clean Energy Solution. Based on recent prices, our 57% investment is approaching $2 billion in value.

FLR CFO Joe Brennan followed with this comment:

Since the beginning of 2021, we have been clear that our intention long term is to own approximately 20% to 25% of NuScale. Currently, we are under a dispatch related lockup period that started in early May. As such, we feel that is premature to provide additional detail on our plans at this time.

One Important Date

There are two key statements made by the CFO.

• They are trying to get to 20-25%.
• They are in a lock-up period right now.

I wanted to figure out more about the lock-up period, specifically when it expired.

According to FLR’s 13D filing:

Fluor Enterprises signed a Lock-up Agreement on December 13, 2021, a form of which is referenced herein as Exhibit 9 and incorporated by reference. Pursuant to the Lock-up Agreement, Fluor Enterprises has agreed, subject to certain exceptions, not to (i) sell, offer to sell, contract or agree to sell, hypothecate, pledge, grant any option to purchase or otherwise dispose of or agree to dispose of, directly or indirectly, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, any shares of Class A Common Stock held by Fluor Enterprises or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of its shares, whether any such transaction is to be settled by delivery of such securities, in cash or otherwise or (iii) publicly announce any intention to effect any transaction specified in (i) or (ii) until 180 days after May 2, 2022.

The Trade

It’s now clear why we're seeing Call buyers in January.

The big buyer, Masters Capital, is in the following:

• 10,000 FLR January $25 Calls 
• 10,000 FLR January $32.50 Calls 

Just last week (August 24^th), he rolled down from the $37.50 Calls into the $32.50 Calls.

These Call buys along with the Insiders taking a $2mm stake in May are all pointing to an undervalued stock with a “nuclear” gem. The recent positive news on nuclear energy should begin to bring this story to the forefront.

In other words, while the market is excited about SMR, it may not be clear that FLR owns 57%.

The lock-up expires on November 2^nd and I suspect they will make some announcement soon after to offload some stock to get them closer to 20-25%.

Earnings happen to be around November 4^th.

Why is the stock seemingly so cheap?

Like many of these commodity companies, a recession can hurt them.
However, owning a ~$2Bn asset with recent “nuclear” momentum tilts the risk-reward in our favor here.

I like the FLR January $30 Calls for $2.40. The Target Stock Price is $40.

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