Breaking up may be hard to do, as the old song says, but Fluor Corp.’s split into two public companies in December has proved sweet for investors.
In less than a year after the split, shareholders of the parent company Fluor have seen their stock value almost double. Both the new Fluor Corp. and Massey Energy Co., the companies created in the breakup of the old Fluor, have reduced their debt, improved their margins and improved their cash flows.
“The management did a good job of positioning both Massey and Fluor for success,” said John Prichard, portfolio manager at Newport Beach-based Knightsbridge Asset Management LLC, who’s familiar with Fluor but is not an investor in the company.
The old Fluor Corp.,one of the first large companies to move to burgeoning OC back in the early ’70s,had two divisions, one focusing on engineering and construction, and the other on coal mining.
Because of the conglomerate-like nature, analysts and investors were careful about investing in the company, which before the split was traded at a price-to-book value ratio of 1.5 with a market capitalization hovering around $2.5 billion.
By splitting into two businesses, management wanted to escape the negatives associated with being a conglomerate, analysts said.
The engineering and construction operations remained with Fluor Corp., while the coal division became Massey Energy.
The move seems to have paid off.
It “changed the character of the two businesses,” said John Rogers, an analyst at Great Falls, Mont.-based D.A. Davidson & Co. “It got them to focus on each of their respective core operations.”
By this month, Massey and the new Fluor had a combined market value of almost $5 billion. Fluor’s stock was trading at four times its book value, while Massey’s stock had a price-to-book value ratio of 1.7. Fluor’s stock has seen a big runup this year before falling back on concerns about power plant work amid wholesale energy price caps in the West.
“The (split) improved the visibility and thus valuations,” Prichard said. “They eliminated the conglomerate discount. People are willing to pay more for a standalone engineering and construction company.”
Prichard said the companies also became operationally more efficient. For the quarter ended June 30, Fluor’s profit rose to $36.1 million, up 300% from $9.2 million prior-year quarter, while its sales declined 10% to $2.3 billion. Its net margin rose from 0.35% to 1.57%.
To be sure, Massey and the new Fluor also benefited from a change in the fortunes of the coal and the engineering and construction industries. Fluor benefited from the California power crisis, as companies rushed to build power plants, while Massey benefited from higher coal prices.
In fact, analyst Rogers attributes virtually all of the improvement in bottom-line performance to the change in business climate.
“I don’t think the (split) has had any impact on margins, or operating efficiencies,” Rogers said.
D.A. Davidson has a “neutral” rating on Fluor.
But Pritchard praised the companies’ management, noting that both have cut their debt burden in half in just nine months. Before the split, the old Fluor had $750 million in outstanding debt. The combined debt of Fluor and Massey now is around $300 million. n
