An Undervalued Engineering Company With Strong Ties to Energy Markets
Just under a year ago, I wrote a piece here suggesting that readers look at buying stock in NuScale (SMR), a young company that designs and builds small modular reactors (SMRs). SMRs are a reputedly safer, more manageable type of nuclear reactor, and my argument then was that a shift in where government green energy money was being targeted, towards nuclear power and away from wind and solar, would be good news for NuScale.
That has panned out, particularly over the last week or so, with the stock now trading at more than three times what it was then. To be honest, I didn’t think Donald Trump would be the one driving that move, but I’ll take good profits any way I can!
Anyway, the move up in SMR had me thinking…cui bono? Who benefits most from the jump in the stock and what looks like being even more gains from here? In most cases, that is a complex question, but in this it is pretty simple. As I pointed out last year, the engineering company Fluor (FLR) was the biggest early investor in SMR and remains the majority shareholder in the company with around a 60% stake.
Figure 1: FLR 1-Year/1- Day Chart
One would think that with SMR basically tripling in price since the beginning of April, there would have been a significant concurrent move in FLR. One would be right in that to a certain extent, but the move up in that stock doesn’t even completely reflect the increase in value in their big investment, let alone the fact that other things at Fluor…
Just under a year ago, I wrote a piece here suggesting that readers look at buying stock in NuScale (SMR), a young company that designs and builds small modular reactors (SMRs). SMRs are a reputedly safer, more manageable type of nuclear reactor, and my argument then was that a shift in where government green energy money was being targeted, towards nuclear power and away from wind and solar, would be good news for NuScale.
That has panned out, particularly over the last week or so, with the stock now trading at more than three times what it was then. To be honest, I didn’t think Donald Trump would be the one driving that move, but I’ll take good profits any way I can!
Anyway, the move up in SMR had me thinking…cui bono? Who benefits most from the jump in the stock and what looks like being even more gains from here? In most cases, that is a complex question, but in this it is pretty simple. As I pointed out last year, the engineering company Fluor (FLR) was the biggest early investor in SMR and remains the majority shareholder in the company with around a 60% stake.
Figure 1: FLR 1-Year/1- Day Chart
One would think that with SMR basically tripling in price since the beginning of April, there would have been a significant concurrent move in FLR. One would be right in that to a certain extent, but the move up in that stock doesn’t even completely reflect the increase in value in their big investment, let alone the fact that other things at Fluor have turned around recently. In short, SMR’s parent company now looks like a better buy than the overperforming child.
First, let’s do the math on their SMR stake. The value of that holding has increased by around $1.7 billion since the end of March, but Fluor’s market cap has risen by only $1.4 billion in that time. That means that close to twenty percent of the gain is not priced into FLR.
More important than the gain in cash value, though, is what Fluor’s stake in NuScale says about the company’s approach and vision. They are based in Texas, with oil and gas operations historically accounting for a large percentage of their revenue. They have been working on shifting that balance, however, and in 2024, just 22% of their sales were dependent on traditional energy. That has led to a more stable company, less exposed to the volatility in oil and gas prices than before, and capable of profiting in almost any political and regulatory environment.
I guess the thing that is probably the biggest negative influence on the stock, and therefore at least partly responsible for the discrepancy in its value versus the value of their SMR holding, is the locations of their primary overseas operations. Those are in China and Mexico, two of the biggest targets of Trump’s “retaliatory tariffs”.
However, over the last few weeks, it has become pretty clear that what those inside the administration have said all along, that the tariffs were essentially a negotiating tactic and not intended to be in place for the long term, is indeed the case. Deals are being done, and tariff rates are being reset. That is more good news for a company like Fluor with significant interests overseas.
FLR also looks like a bit of a steal from balance sheet and valuation perspectives. They have positive free cash flow and more cash on the books than debt, indicating an admirable stability. And the valuation metrics are even more compelling. Last year, FLR traded in a range of around 20 to 70 times earnings. Right now, it exhibits a trailing P/E of around 4, with a PEG ratio, wherein a value below 1 suggests value, of 0.3. That screams value.
There are risks, of course. FLR has been falling for some time, mostly because they have missed their own targets for growth and revenue in the last couple of earnings reports. They have done better than in the past, but not as well as they forecast. That is more about overpromising than anything else, and as the company dials back its projections to more realistic levels, Wall Street’s expectations are also being adjusted. The forecast EPS for this quarter has dropped from $0.73 three months ago to $0.56, for example, making a big miss when they next release earnings on July 11th a lot less likely.
In many ways, FLR is exactly the kind of stock that I look for. It has been punished for underperformance but not rewarded sufficiently for addressing the problems. In addition, the tariff question has weighed on the stock price, but that seems like much less of a problem now than it was even a week ago. Then, when you add in the fact that a company that they own 60% of is flying high but not fully priced in, FLR looks like a bargain buy despite having posted significant gains over the last two months or so.