Fluid control is a $130 billion market worldwide; Flowserve Sees Big Opportunities to Grow; A specialist in fluid-control products, the company is thriving along with its industrial customers

Flowserve Sees Big Opportunities to Grow

A specialist in fluid-control products, the company is thriving along with its industrial customers.



May 10, 2014

As a leading maker of pumps, seals, valves, and other fluid-control products, Flowservecould see a torrent of growth in coming years. The company stands to benefit as its customers, chiefly energy, engineering, and construction concerns, complete the build-out of large infrastructure projects across the globe.

Although Flowserve’s shares (ticker: FLS) have more than tripled since September 2011, to a recent $75, additional gains could lie ahead. The stock trades for 16.9 times Wall Street’s 2015 consensus earnings estimate of $4.44 a share, a level some skeptics consider fully valued (see “The Many Ways to Tap the Water Boom,” May 5, 2014). But Lee Caleshu, an analyst at Roosevelt Investment Group in New York, sees Flowserve earning $5 a share next year, and commanding a price/earnings ratio of 18, which implies a stock price of $90.

“If the engineering and construction industry can meet its expectations for growth, and Flowserve garners its fair share of this business, our analysis suggests Flowserve should exceed expectations by a wide margin,” says Caleshu, whose firm owns Flowserve shares.

Flowserve earned $486 million, or $3.41 a share, in 2013, on revenue of $5 billion. Management recently reaffirmed earnings guidance of between $3.65 and $4 a share for this year, on a 3% to 6% uptick in revenue. Janney Capital Markets expects earnings to get an assist as profit margins widen to 16% from 15.4% now.

Flowserve’s revenue has grown by 7% a year for the past few years. Despite slower growth this year, the company is forecasting annual gains of 8% to 10% in the next four years, leading to as much as $8 billion in revenue in 2018.

Recent Price $75.02
12-Month Change 38.3%
Market Value (bil) $10.4
2013 Revenue (bil) $5.0
2013 EPS $3.41
2014E EPS $3.93
2015E EPS $4.44
20154E P/E 16.9
Dividend Yield 0.9%
Source: Thomson Reuters

Flowserve was formed in 1997 through the merger of valve producer Durco International and BW/IP, a maker of pump. After years of divestitures and acquisitions, the company, based in Irving, Texas, now operates via three divisions. Engineered product, which makes products for large-scale projects, contributed 49% of last year’s revenue, and 50% of operating profit. Industrial product, which produces turbine pumps, accounted for 18% of sales and almost 14% of earnings. The third division, flow control, provides valves and aftermarket parts and services. The fast-growing aftermarket business helped drive better-than-expected earnings in the first quarter.

Investors praise Flowserve’s diverse product portfolio, as well as its global reach. The company operates in 50 countries on five continents, with North America and Europe contributing a combined 55% of revenue in 2013.

Fluid control is a $130 billion market worldwide. Flowserve’s addressable market, at $98 billion, is growing by more than 6% a year, driven by improving global economic growth, increased industrial production, and population growth, especially in developing markets. Original-equipment manufacturers in the company’s end markets have been ramping up capital spending, spurring demand for pumps and valves.

Flowserve controls 5% of the market for its products, but is aiming to boost its share by growing faster than peers. To gain an advantage, it is combining the sale of pumps, valves, and seals to satisfy customers’ growing need for “bundled” services. The company has built 179 quick-response centers close to its customers’ facilities to provide swifter turnaround of repairs and a ready supply of aftermarket parts and services.

CRITICS GROUSE THAT Flowserve’s backlog, currently $2.7 billion, has seen anemic growth in recent years. But management, led by CEO Mark Blinn, says it’s protecting margins by taking a disciplined bidding approach to many early-round, large-scale projects. Flowserve boasts a 13% return on invested capital, one of the best among its industrial peers, which include SPX (SPW), ITT (ITT), and Idex (IEX).

Blinn, 52, joined Flowserve as chief financial officer in 2004 from FedEx‘s (FDX) Kinko’s unit, to help the company recover from an accounting scandal that led to earnings restatements in the early 2000s. He became CEO in 2009. He was unavailable to comment.

The Bottom Line

Flowserve shares have rallied sharply in recent years, but could keep rising as demand for the company’s products grows. One analyst sees the stock hitting $90 from a current $75.

Accounting irregularities have been replaced by a disciplined capital-allocation policy geared to returning cash to shareholders. At about 20%, Flowserve has one of the lowest debt-to-capitalization ratios in the flow-control business, and management is committed to returning 40% to 50% of average two-year net earnings to investors through dividends or share repurchases. Since 2008, the company has bought back more than 40 million shares, while the annual payout has nearly doubled to 64 cents, for a yield of 0.9%.

Analysts expect Flowserve to generate $2 billion of free cash flow from 2014 through 2018. It’s a good bet much of it will go to shareholders. That’s just the sort of flow control Wall Street adores.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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