Joel Greenblatt (Trades, Portfolio) is founder and managing partner of Gotham Asset Management, LLC. He is known for the invention of Magic Formula Investing. He is the author of two investment books, including Joel Greenblatt: The Little Book that Beats the Market . He is also an adjunct professor with Columbia Business School.
Greenblatt tries to find cheap and good companies. He looks for value with a catalyst. Greenblatt likes special situations and thinks that they are simply different places to find cheap stocks. In his own hedge fund, Greenblatt uses the basic principals in the Magic Formula: Look for high ROC and high earnings yield. He tries to figure out what "normalized earnings" will be 3-4 years into the future. Greenblatt makes sure the stock is very cheap based on normalized earnings.
Last quarter, he increased his holdings in Flowserve (FLS, Financial) by buying 698,441 shares. As of December 31, 2014, he was holding 1,446,115 shares of the company. The following chart shows his holding history in the company.
Flowserve Corporation is a world-leading manufacturer and aftermarket service provider of comprehensive flow control systems. The company develops and manufactures precision-engineered flow control equipment integral to the movement, control and protection of the flow of materials in its customers’ critical processes. Its product portfolio of pumps, valves, seals, automation and aftermarket services supports global infrastructure industries, including oil and gas, chemical, power generation (including nuclear, fossil and renewable) and water management, as well as certain general industrial markets where the company’s products and services add value. Through its manufacturing platform and global network of Quick Response Centers, Flowserve offers a broad array of aftermarket equipment services, such as installation, advanced diagnostics, repair and retrofitting.
The company has seen good growth over the last five years with its sales increases 21% and EPS increasing 64%. The company is passing on benefits of this improved performance to shareholders through dividends and share buy backs. The company has increased its dividend from $0.39 in 2010 to $0.64 in 2014. Since the company announced its buyback program in late 2011, it has returned almost $1.68 billion to its shareholders through opportunistic share repurchases. With recent correction in its share price, we can expect these opportunistic share repurchases to continue.
Going forward, the company is facing some headwinds from falling oil prices and adverse foreign exchange movements in 2015. The strengthening U.S. dollar against most world currencies is a significant headwind as roughly two-thirds of its revenue is generated outside the United States. Further, the company’s customers are also delaying spending on their repair and maintenance needs due to recent correction in oil prices.
However, the good news is that maintenance and repair work is likely to improve going forward as this activity cannot be delayed indefinitely. Further, management used the recent correction in stock prices as an opportunity to buy back shares and returned $100 mn to shareholders through buyback and dividends in the last quarter. Management is also looking for inorganic growth opportunities as valuations in the sectors are now at attractive levels.
For the current year sell side is expecting the company’s EPS to decline to $3.32. However, they expect the company’s growth to resume next year and EPS to increase to $3.74. The company’s stock looks undervalued and according to Gurfocus DCF calculator, the company’s business predictability rating is 3.5 star and margin of safety is 37%.
I believe the stock offers a good value at current levels and long term investors should look beyond the near term issues to buy Flowserve's stock at attractive valuations.
