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May 23, 2024

Trade Idea: FLR $37.73 (Fluor Corp.)

Buy October 18th $42.50 Calls for $2.90

TI FLR chart Winning Picks 052324

We got long FLR in March after the earnings drop. The latest earnings wasn’t enough and the stock dropped again. This time it’s made a higher low and is now trying to push back up.

Not much has changed from the last time, but I suspect that Wall Street will soon have no choice but to recognize FLR as a key beneficiary of the AI data center/power trend.

Engineers

Fluor (FLR) is the largest publicly traded engineering and construction company in the Fortune 500. As governments and corporations build out plants, oil & gas project, industrial projects, data centers and the rest, they need committed investments, planning… and engineers.

And there isn’t an infinite amount of engineers out there.

It’s easy to say: “AI needs way more power. Let’s just make sure we have that powered secured. And if we don’t then build it out.”

It’s the last part, you know, the actual “building” part that takes a good amount of time, expertise, and manpower.

I caught one sentence in the last transcript that jumped off the page. FLR CEO David Constable stated:

“Some clients are just deciding to sign up agreements to make sure they get their arms around ‘A teams’ and engineering talent so that they have locked out their competition.”

If the CEO is telling you that customers are getting into contracts now to make sure they have the best engineers later in order to beat the competition, then the price of the next contracts are going to go up pretty quickly.

Essentially, Fluor is the beneficiary of an imbalance of supply and demand for “A Team” people.

We’ve heard about the huge demand for:

1. AI which led to…
2. Chips which led to…
3. Data Centers which led to…
4. Cooling systems which led to…

5. Power which led to…

Soon enough you will hear the world say: “OMG, we need more engineers!!!”

And snapping your fingers or clicking your heels 3x isn’t going to work.


Data Centers + Power

Like the rest of the world, FLR is focused on the data center opportunity. There’s one piece of the puzzle that competitors don’t have. FLR has leading engineers in the nuclear space and own 60% of NuScale Power Corp (ticker: SMR $7.33, Mkt Cap = $1.8Bn), which designs and markets small module (nuclear) reactors or “SMR’s”.

Here’s the CEO again:

“On a parallel track, clients are orienting their CapEx plans toward data centers to support AI, while it’s still early days, we are well-positioned to support our clients in this space. Looking ahead, we see data center investment gaining momentum in the U.S. Midwest, the European Union, and Asia.”

He later added…

“It's a massive requirement on clean power. And I can tell you that there's significant and detailed discussions ongoing with those types of clients looking to NuScale to solve those challenges…  We have 3 overarching objectives that we need on our side to ensure success. And that is, first of all, ensure the successful commercialization of the NuScale technology, number one. Number two, drive maximum value for Fluor's shareholders through the monetization of our NuScale shares. And thirdly, and importantly, ensure Fluor's engineering construction and project management services are participating globally on NuScale projects where we can add value.”

It appears that the combination of FLR’s ‘A Team’ engineers combined with small module nuclear reactors experience gives them an edge in these data center bidding conversations.

The following comments were so interesting to me because I thought all these data centers were already being built out. I am learning that the bidding process for data centers in the U.S. hasn’t even started yet (for the most part):

“We're looking to support the build-out of data centers in the U.S. and globally. For example, our build-out of data centers for Microsoft in India is one example internationally. But we expect to also bring that experience to bear in the U.S. as these data centers start to come out to bid … and we're well-positioned to support those clients in that space. And you know who the big players are for data centers. And -- so we're right in the thick of it right now in positioning.” 

Again, wait until the world figures out there just aren’t enough engineers because they have been “locked up” by the big customers like MSFT.

The Trade

Masters Capital has been in this name with stock/calls for sometime. I think he is in the 10,000 FLR June 21st $42.50 Calls and the 7,000 $45 Calls. When they get listed, I am fairly certain that he'll roll them out to August expiry to capture earnings in early-August.

The stock is in an $8 range between $35 and $43 over the last 6 months. A break of $43 would open the door for a move to $51.

The long-term looks bright for the company. As demand for their services increases they are able to win more “80% reimbursable” contracts, which means 80% of their cost gets paid back to them. As the market for engineers tightens up, this 80% will go up.

A higher reimbursable contract lowers FLR’s risk, which lowers the volatility of earnings. Investors like stability and would reward the company with a higher P/E over time.

Lastly, keep an eye out on NuScale (SMR). It is heavily shorted stock with short interest near 22%. Any good news on that front, including monetization, could drive the stock higher.

I like the FLR October 18th $42.50 Calls for $2.95. The Target Stock Price is $51.


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