Buried within Fluor Corporation's recent Q4 2023 earnings call lies a tantalizing tidbit, a potential gold mine for astute investors that seems to have flown under the radar of most analysts. The company, known for its engineering and construction prowess in global energy and infrastructure projects, has quietly embarked on a U.S. resurgence, one that could dramatically reshape its financial landscape and unlock significant shareholder value.

This isn't about a sudden shift in strategy or a chase after fleeting domestic trends. It's a calculated move, carefully orchestrated over the past few years, to rectify a historical anomaly: Fluor's unprofitability in its home market. As CFO Joe Brennan candidly revealed during the call, "We have not been profitable in the U.S. for a number of reasons over the past 5, 6 years... which has created some tax friction."

This seemingly innocuous statement carries profound implications. For years, Fluor's U.S. operations have acted as a drag on its overall profitability, generating losses that not only chipped away at earnings but also created a tax burden due to the inability to fully utilize accumulated tax benefits. This 'tax friction,' as Brennan aptly describes it, has kept Fluor from realizing its full earnings potential.

Now, the tide appears to be turning. Brennan hints at a "clean pathway to getting back to profitable in the United States," a shift driven by "traction and growth in our backlog here in the United States." This suggests that Fluor's U.S. operations are on the cusp of a profitability turnaround, one that could alleviate the tax burden and unleash a torrent of previously untapped earnings.

Let's delve into the numbers. Fluor's current effective tax rate, as per their 2024 guidance, stands at approximately 35%. If the U.S. operations achieve profitability, the company could significantly reduce this rate by utilizing its accumulated tax benefits, potentially bringing it closer to the statutory U.S. corporate tax rate of 21%.

The impact on earnings would be substantial. Assuming a conservative estimate of $2 billion in U.S. revenue for 2024 (based on recent trends and management's comments), a 14% reduction in the effective tax rate would translate to a $280 million boost to after-tax earnings, a significant leap for a company currently guiding for $600 million to $700 million in adjusted EBITDA.

The potential upside doesn't end there. Brennan also mentions "our use of value VA sitting on our balance sheet." This refers to Valuation Allowances, a contra-asset account that reflects the potential un-recoverability of deferred tax assets. As U.S. profitability improves, Fluor could release these allowances, further bolstering its earnings and improving its balance sheet.

This U.S. resurgence adds another layer of intrigue to Fluor's already compelling growth story. The company, founded over a century ago in California, is now positioned as a leading player in some of the most exciting growth markets globally, including energy transition, advanced technologies, and life sciences. Its high reimbursable backlog, disciplined contract pursuit criteria, and focus on project execution excellence all point towards a future of sustained profitability and shareholder value creation.

While the focus of analysts and investors is understandably drawn towards Fluor's global mega projects and high-profile energy transition initiatives, the company's quiet transformation in its home market deserves equal attention. This potential tax play, fueled by a strategic U.S. resurgence, could be the catalyst that sends Fluor's earnings soaring and unlocks a treasure trove of shareholder value.

Hypotheses:

Fluor's U.S. operations, historically unprofitable, are poised for a profitability turnaround.

This turnaround will enable the company to utilize accumulated tax benefits and reduce its effective tax rate.

A reduction in the effective tax rate, combined with potential release of Valuation Allowances, will significantly boost earnings.

Key Numbers:

Backlog Growth Across Segments (Q4 2022 - Q1 2024):

Data extracted from earnings call transcripts.

Conclusion:

Fluor's U.S. resurgence is a strategically significant development with the potential to unleash substantial shareholder value through reduced tax burden, improved earnings, and a strengthened balance sheet. This hidden tax play, largely overlooked by analysts, could be the key to Fluor's future financial success.

"Fun Fact: Fluor Corporation played a critical role in the Manhattan Project during World War II, providing engineering and construction expertise for the development of the atomic bomb. Today, the company continues to be a leader in nuclear energy, supporting both traditional and advanced reactor programs."