This article is part of ourRising Star Portfolio series.
Last time I made a purchase for the real-money Rising Star portfolio I'm managing for Fool.com, I bought a few shares of highly recognizable consumer name Chipotle. Now I'm heading in a different direction. I've had my eye on construction and engineering stock Fluor Corp. (NYS: FLR) for a while, and I've decided it's time to take a stake.
This portfolio focuses on social responsibility, and here's how Fluor fits into that worldview: the company's reputation for ethical conduct. The recent Wal-Mart (NYS: WMT) scandal in Mexico is a good reminder that ethical behavior can be a competitive advantage.
Irving, Texas-based Fluor Corp., founded in 1912, provides construction, engineering, maintenance, and project management services across the globe. As of its most recent Form 10-K, Fluor employed about 43,000 people.
Fluor serves major customers in a variety of industries and segments, such as oil and gas, power, industrial and infrastructure, and government. Although this may not sound like the kind of company that could be a bastion of social responsibility, one of the reasons it hit my radar was its inclusion in Ethisphere's list of the World's Most Ethical Companies. In fact, it's made that list for six straight years.
Fluor's 2010 sustainability report outlines its commitment: "Succeed today without compromising tomorrow." One of its sweeping routes has been its 2009 introduction of a companywide Fluor Sustainability Manual, compiling best practices into its own processes and those it provides to its clients. Fluor claims this manual differentiates it from the rest of its industry.
Every year, Fluor executes about 1,000 projects for more than 600 clients in 66 different countries, so this is a major undertaking. In addition, Fluor boasts that it has consistently been rated as one of the world's safest contractors.
Fluor's commitment goes beyond projects where it's taking a more sustainable approach to building. It's also committed to inculcating in its employees the importance of ethics and avoidance of corruption in the far-flung areas in which it works. These drivers are outlined in its Code of Business Conduct and Ethics, and the company also has an Anti-Bribery and Corruption policy. Fluor also provides a hotline to make it easier for employees to report any suspected unsavory behavior.
Why I'm buying
Last year, Fluor increased its total revenue by 12.1% to $23.38 billion, and generated $593.7 million, or $3.40 per share, in profit. This followed several difficult years of falling sales and profits -- hardly shocking given the global economic situation.
More recently, Fluor reported impressive quarterly results, including a handsome backlog of orders, which surged 14% to $42.5 billion.
Fluor has a very strong balance sheet. It has a mere $533 million in debt, and $2.23 billion, or $13 per share, in cash. Adding Fluor to this portfolio also means adding another dividend payer to the mix, as well as enhanced diversification.
Despite heartening signs that Fluor's piling up projects, it currently trades well below its 52-week high of about $73. Right now the stock's trading at just 12 times forward earnings, and sports a PEG ratio of 1.26, neither of which look tremendously overvalued given long-term growth potential for this kind of company.
Granted, rival KBR's (NYS: KBR) multiples look a bit cheaper, but Fluor's in a higher class. A KBR executive was recently sentenced to more than two years in prison for bribing Nigerian officials for contracts. I've seen other things I don't particularly like about KBR, too, such as legal actions against an activist shareholder.
Recent allegations that Wal-Mart doled out millions of dollars in bribes to aid in expansion in Mexico underlines the importance of managements that strive for high ethical standards in their business dealings both here and abroad. Fluor has been trying to lead the way.
And now, the risks
Fluor faces plentiful competition, including the aforementioned KBR and others, like Jacobs Engineering and private construction giant Bechtel Group. Many companies compete for contracts in the same markets.
Although Fluor boasts projects emphasizing environmental sustainability, it does plenty of business with the oil and gas and power industries, which aren't always looked upon so kindly by socially responsible investors. One of Fluor's significant clients is ExxonMobil (NYS: XOM) , which represented 13% of its revenue last year.
The domestic and global economic outlook is a major risk, too; most of us haven't missed the fact that many countries' governments are pretty broke at the moment, as people wrangle over austerity. Companies like Fluor rely on growth and breaking ground on new, massive-scale projects, including public ones. In fact, the U.S. government represented another 14% of Fluor's revenue last year, and government-spending cutbacks could have a negative effect on many companies.
Fluor also does a lot of business in countries that are laden with political risk, like Afghanistan, Iraq, Russia, and China. Some of these areas involve economic risk, too; lower rates of Defense Department spending will likely curtail Fluor's business in the Middle East and Afghanistan.
As is common in its industry, Fluor uses the percentage-of-completion accounting method. Basically, this means Fluor recognizes profits and revenue incrementally over the lifetime of projects using estimates. If management misjudges, it could result in a reversal of previously recorded financial statements.
For an example of how this accounting method can be problematic, check out what's been going on with Computer Sciences Corp. (NYS: CSC) , which is currently undergoing a Securities & Exchange Commission investigation into its accounting, including some contracts that used the methodology.
Given Fluor's focus on ethics, though, I suspect management will continue to make what it calls "reliable estimates" of its progress on the completion of its long-term contracts.
The Foolish bottom line
I'm always glad to add some diversity to this portfolio, and adding a construction and engineering firm into the mix achieves that goal. If we're going to try to build a better world, it's good to know there are companies that are willing to tackle some of the challenges in creating the foundations.
At the time thisarticle was published Alyce Lomax does not own shares of any of the companies mentioned in her personal portfolio. The Motley Fool owns shares of Chipotle Mexican Grill. Motley Fool newsletter services have recommended buying shares of ExxonMobil and Chipotle Mexican Grill. Motley Fool newsletter services have recommended creating a bear put spread position in Chipotle Mexican Grill and a diagonal call position in Wal-Mart Stores. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.