Flowserve Corporation (FLS, Financial) 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 sells its products and services to more than 10,000 companies, including some of the world’s leading engineering, procurement and construction firms, original equipment manufacturers, distributors and end users. Its products and services are used in several distinct industries having a broad geographic reach. The company’s bookings mix by industry in 2014 consisted of oil and gas (43%), Chemical (20%), Power Generation (12%), Water Management (3%), and General Industries including mining, pharmaceuticals, food and beverage (22%)
The company conducts its operations through three business segments:
- Engineered Product Division ("EPD") for long lead time, custom and other highly-engineered pumps and pump systems, mechanical seals, auxiliary systems and replacement parts and related services;
- Industrial Product Division ("IPD") for pre-configured engineered pumps and pump systems and related products and services; and
- Flow Control Division ("FCD") for engineered and industrial valves, control valves, actuators and controls and related services.
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 buy back 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.
