Construction Stocks

Flowserve Corp Valuation – February 2018 $FLS

Company Profile (obtained from Marketwatch): Flowserve Corp. develops and manufactures precision-engineered flow control equipment integral to the movement, control and protection of the flow of materials in its customer’s critical processes. It also engaged in providing fluid motion and control products and services. The company manufactures and supplies engineered and industrial pumps, seals and valves as well as a range of related flow management services. It also provides automation and services to the power, oil, gas, chemical and other industries. The company operates through the following segments: Engineered Product, Industrial Product, and Flow Control Division. The Engineered Product Division segment designs, manufacture, distribute and service custom and other highly-engineered pumps and pump systems, mechanical seals and auxiliary systems. The Industrial Product Division segment designs, manufacture, distribute and service engineered, pre-configured industrial pumps and pump systems, including submersible motors and specialty products. The Flow Control Division segment designs, manufactures and distributes a broad portfolio of engineered-to-order and configured-to-order isolation valves, control valves, valve automation products, boiler controls and related services. Flowserve was founded in 1997 and is headquartered in Irving, TX.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of FLS – February 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $5,532,392,093 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.06 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -65.28% Fail
6. Moderate PEmg Ratio PEmg < 20 34.64 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.36 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.06 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.14 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

 

Stage 2: Determination of Intrinsic Value

EPSmg $1.22
MG Growth Estimate -4.25%
MG Value $0.00
Opinion Overvalued
MG Grade F
MG Value based on 3% Growth $17.73
MG Value based on 0% Growth $10.39
Market Implied Growth Rate 13.07%
Current Price $42.35
% of Intrinsic Value N/A

Flowserve Corp does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $3.21 in 2014 to an estimated $1.22 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 13.07% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Flowserve Corp revealed the company was trading above its Graham Number of $20.91. The company pays a dividend of $0.76 per share, for a yield of 1.8% Its PEmg (price over earnings per share – ModernGraham) was 34.64, which was above the industry average of 25.98. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-5.3.

Flowserve Corp scores quite poorly in the ModernGraham grading system, with an overall grade of F.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$5.30
Graham Number $20.91
PEmg 34.64
Current Ratio 2.06
PB Ratio 3.36
Current Dividend $0.76
Dividend Yield 1.79%
Number of Consecutive Years of Dividend Growth 11

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2017
Total Current Assets $2,558,745,000
Total Current Liabilities $1,242,908,000
Long-Term Debt $1,499,658,000
Total Assets $4,910,474,000
Intangible Assets $1,428,237,000
Total Liabilities $3,255,887,000
Shares Outstanding (Diluted Average) 131,417,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.53
Dec2017 $0.02
Dec2016 $1.01
Dec2015 $1.93
Dec2014 $3.72
Dec2013 $3.41
Dec2012 $2.84
Dec2011 $2.55
Dec2010 $2.29
Dec2009 $2.53
Dec2008 $2.58
Dec2007 $1.49
Dec2006 $0.67
Dec2005 $0.10
Dec2004 $0.16
Dec2003 $0.27
Dec2002 $0.16
Dec2001 -$0.14
Dec2000 $0.12
Dec1999 $0.11
Dec1998 $0.41

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.22
Dec2017 $1.39
Dec2016 $2.24
Dec2015 $2.87
Dec2014 $3.21
Dec2013 $2.88
Dec2012 $2.59
Dec2011 $2.41
Dec2010 $2.20
Dec2009 $1.93
Dec2008 $1.42
Dec2007 $0.73
Dec2006 $0.33
Dec2005 $0.14
Dec2004 $0.15
Dec2003 $0.13
Dec2002 $0.08

Recommended Reading:

Other ModernGraham posts about the company

11 Best Stocks For Value Investors This Week – 11/21/15
Flowserve Corp Valuation – November 2015 Update $FLS
The Best Companies of the Construction Industry – October 2015
15 Best Stocks For Value Investors This Week – 8/22/15
Flowserve Corporation Analysis – August 2015 Update $FLS

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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