BUSINESS
Flowserve Corporation designs, develops, manufactures, distributes, and services industrial flow management equipment in the United States, Europe, the Middle East, Africa, Asia, and internationally. It operates in two segments, Flowserve Pump Division (FPD) and Flow Control Division (FCD). The FPD segment offers custom and pre-configured pumps and pump systems, mechanical seals, auxiliary systems, replacement parts, upgrades, and related aftermarket services, including installation and commissioning services, seal systems spare parts, repairs, advanced diagnostics, re-rate and upgrade solutions, retrofit programs, and machining and asset management solutions, as well as manufactures a gas-lubricated mechanical seal for use in high-speed compressors for gas pipelines.
INVESTMENT RATING
FLS is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Flowserve has a current Value Trend Rating of C (Neutral).
This rating combines very contradictory signals from two proprietary PTR measures of a stock’s attractiveness. Flowserve has a poor Appreciation Score of 18 but a good Power Rating of 82, producing the Neutral Value Trend Rating.
Flowserve’s stock is selling significantly above targeted value. The current stock price of $47.88 compares to targeted value 12 months forward of $30.
Flowserve’s low appreciation potential results in an appreciation score of 18 (82% of the universe has greater appreciation potential.)
Flowserve has a Power Rating of 82. (FLS’ good Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 18% of companies in the universe.)
Factors contributing to this good Power Rating include: the Pumps and Pumping Equipment comparison group is in an extremely strong phase currently; recent price action has been favorable; and earnings estimate behavior for FLS has been slightly favorable recently.
INVESTMENT PROFILE
Flowserve’s financial strength is low. Financial strength rating is 19.
Relative to the S&P 500 Composite, Flowserve Corp. has neutral Growth/Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that FLS is extremely high risk. High expected growth is a positive for Flowserve. Relative weaknesses include: low financial strength, high stock price volatility, low historical growth, and high earnings variability. Flowserve’s valuation is moderate: moderate dividend yield, median P/E ratio, and moderate price/book ratio. FLS has unusually low market capitalization.
CURRENT SIGNALS
Flowserve’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; and rising leverage.
Flowserve’s current technical position is very strong. The stock price is in a 12.8 month up move. The stock has appreciated 58.5% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
Important positive changes in Flowserve Corp. (NYSE: FLS) investment behavior have recently occurred: positive upside/downside volume developed.
Recent minimal positive changes in fundamentals have benefitted Flowserve Corp. (NYSE: FLS): significant quarterly earnings acceleration occurred.
The stock is currently rated C.
Flowserve Corp. (NYSE: FLS) stock closed at $47.88 on 4/5/24 after an increase of 1.6%. Moreover, unusually high trading volume at 189% of normal accompanied the advance. The stock has risen 4.7% during the last week and has been strong relative to the market over the last nine months.
CASH FLOW
In 2023, Flowserve generated a very significant increase in cash of +$110.7 million (+25%). Sources of cash were much larger than uses. Cash generated from 2023 EBITDA totaled +$478.4 million. Non-operating uses consumed -$121.4 million (-25% of EBITDA). Cash taxes consumed -$25.1 million (-5% of EBITDA). Re-investment in the business amounted to -$22.0 million (-5% of EBITDA). On a net basis, debt investors received -$123.5 million (-26% of EBITDA) while equity investors removed -$75.6 million (-16% of EBITDA).
Flowserve’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Flowserve Peer Group. In most years, Flowserve was in the third quartile and top quartile. Currently, Flowserve is below median at -25% of EBITDA (-$121.4 million).
Flowserve’s Cash Taxes, %EBITDA enjoyed a strong overall uptrend over the period. This improvement was accompanied by stability for the Flowserve Peer Group. In most years, Flowserve was in the third quartile and lower quartile. Currently, Flowserve is above median at -5% of EBITDA (-$25.1 million).
Flowserve’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Flowserve Peer Group. In most years, Flowserve was in the top quartile and second quartile. Currently, Flowserve is above median at -5% of EBITDA (-$22.0 million).
Flowserve’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Flowserve Peer Group. (Since 2021 Debt Investors, %EBITDA has experienced a very sharp recovery.) In most years, Flowserve was in the second quartile and top quartile. Currently, Flowserve is slightly above median at -26% of EBITDA (-$123.5 million).
Flowserve’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Flowserve Peer Group. In most years, Flowserve was in the third quartile and lower quartile. Currently, Flowserve is substantially below median at -16% of EBITDA (-$75.6 million).
Flowserve’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Flowserve Peer Group. (Since 2021 Change in Cash, %EBITDA has experienced a very sharp recovery.) In most years, Flowserve was in the second quartile and lower quartile. Currently, Flowserve is above median at +23% of EBITDA (+$110.7 million).
Flowserve’s Cash, %Revenue has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Flowserve Peer Group. (Since 2020 Cash, %Revenue has experienced a very sharp decline.) In most years, Flowserve was in the second quartile and third quartile. Currently, Flowserve is slightly below median at +13%.
PROFITABILITY
Flowserve’s return on equity has improved slightly since 2014. The current level of 9.6% is 1.18X the low for the period and is -64.1% from the high.
A major analytical focus for FLS is a very strong negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors.
The productivity of Flowserve’s assets declined over the full period 2014-2023: asset turnover has experienced a downtrend.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend even as it experienced a very sharp recovery after the 2021 low.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
Flowserve’s return on equity is at median (9.6%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is slightly above median (4.4%) reflecting asset turnover that is at median (0.85X) and below median pretax margin (5.2%).
Tax “keep” rate (income tax management) is at the upper quartile (83.5%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is at median (2.64X).
GROWTH RATES
There are no significant differences between Flowserve’s longer term growth and growth in recent years.
Flowserve’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been -1.0% per year.
Total asset growth has been 0.3% per year.
Annual E.P.S. growth has been 5.0% per year.
Equity growth has been 1.2% per year.
Flowserve’s consensus growth rate forecast (average of Wall Street analysts) is 17.7% — substantially above the average of the historical growth measures.
Relative to the Flowserve Peer Group, Flowserve’s historical growth measures are erratic. E.P.S. growth (5.0%) has been at median. Equity growth (1.2%) has been at the lower quartile. Revenue growth (-1.0%) has been lower quartile. Total asset growth (0.3%) has been lower quartile.
Consensus growth forecast (17.7%) is at the upper quartile.
PRICE HISTORY
Over the full time period, Flowserve’s stock price performance has been variable and significantly below market. Between June, 2013 and April, 2024, Flowserve’s stock price fell -11%; relative to the market, this was a -73% loss. Significant price moves during the period: 1) June, 2019 – March, 2020: -55%; and 2) February, 2014 – January, 2016: -52%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 24.6% is above median relative to the S&P 500 Composite.
In addition to being above median relative to S&P 500 Composite, current annual total return performance through February, 2024 of 24.6% is substantially above median relative to Flowserve Corp. Peer Group.
Current 5-year total return performance of 1.3% is lower quartile relative to the S&P 500 Composite.
Through February, 2024, with lower quartile current 5-year total return of 1.3% relative to S&P 500 Composite, Flowserve’s total return performance is at median relative to Flowserve Corp. Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, FLS’ overall valuation is normal. The highest factor, the price/earnings ratio, is near the upper quartile. Ratio of enterprise value/earnings before interest and taxes is slightly above median. Price/equity ratio is at median. Ratio of enterprise value/assets is slightly below median. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.
Relative to Flowserve Peer Group, FLS’ overall valuation is quite high. The highest factor, the price/equity ratio, is at the upper quartile. Price/earnings ratio is upper quartile. Ratio of enterprise value/assets is at the upper quartile. Ratio of enterprise value/earnings before interest and taxes is above median. The lowest factor, the ratio of enterprise value/revenue, is slightly above median.
Flowserve has a minor value gap compared to the median. For FLS to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 1.78X to 1.64X. If FLS’ ratio of enterprise value/revenue were to fall to 1.64X, its stock price would be lower by $-5 to $43.
For FLS to achieve upper quartile valuation relative to the Flowserve Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.78X to 2.93X. If FLS’ ratio of enterprise value/revenue were to rise to 2.93X, its stock price would increase by $38 from the current level of $48.
VALUE TARGETS
FLS is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Flowserve’s current Price Target of $30 represents a -38% change from the current price of $47.88.
Flowserve’s low appreciation potential results in an appreciation score of 18 (82% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 18, the high Power Rating of 82 results in an Value Trend Rating of C.
Flowserve’s current Price Target is $30 (+5% from the 2023 Target of $28 but -38% from the 04/05/24 price of $47.88). This plateau in the Target is the result of a +3% increase in the equity base and a +2% increase in the price/equity multiple. One Driver has a positive impact on the price/equity multiple, one has a negative impact, and one has no effect. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple. The forecasted growth has no impact. The forecasted increase in cost of equity has a very large negative impact.
PTR’s return on equity forecast is 20.4% — substantially above our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2015 and 2023. The current forecast is significantly above the 2022 low of 8%.
PTR’s growth forecast is 0.0% — in line with our recent forecasts. Forecasted growth erratic between 2021 and 2023. The current forecast is steady at the 2021 peak of 1%.
PTR’s cost of equity forecast is 10.9% — above recent levels. Forecasted cost of equity enjoyed a dramatic, variable decline between 2015 and 2023. The current forecast is well above the 2022 low of 4.4%.
At Flowserve’s current price of $47.88, investors are placing a positive value of $1 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 0.0% per year, and a return on equity of 9.8% versus a cost of equity of 5.3%.
PTR’s 2025 Price Target of $30 is based on these forecasts and reflects an estimated value of existing assets of $38 and a value of future investments of $-8.
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