Construction Stocks

Flowserve Corp Valuation – January 2019 $FLS

Company Profile (excerpt from Reuters): Flowserve Corporation, incorporated on May 1, 1912, is a manufacturer and aftermarket service provider of flow control systems. The Company’s segments include Engineered Product Division (EPD), Industrial Product Division (IPD) and Flow Control Division (FCD). The Company’s geographic segment includes North America, Europe, Asia Pacific, Middle East and Africa, and Latin America. The Company 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. The Company’s product portfolio of pumps, valves, seals, automation and aftermarket services supports 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 its products and services add value. The Company offers a range of aftermarket equipment services, such as installation, diagnostics, repair and retrofitting through manufacturing platform and network of Quick Response Centers (QRCs). The Company’s products include oil and gas, general industries, chemical, power generation and water management.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of FLS – January 2019

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 $4,975,183,199 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.24 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 -72.74% Fail
6. Moderate PEmg Ratio PEmg < 20 36.58 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.06 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 2.24 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.12 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 $1.04
MG Growth Estimate -4.25%
MG Value $0.00
Opinion Overvalued
MG Grade F
MG Value based on 3% Growth $15.07
MG Value based on 0% Growth $8.83
Market Implied Growth Rate 14.04%
Current Price $38.02
% 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 $1.04 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 14.04% 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 $16.73. The company pays a dividend of $0.76 per share, for a yield of 2% Its PEmg (price over earnings per share – ModernGraham) was 36.58, which was above the industry average of 20.63. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-4.95.

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) -$4.95
Graham Number $16.73
PEmg 36.58
Current Ratio 2.24
PB Ratio 3.06
Current Dividend $0.76
Dividend Yield 2.00%
Number of Consecutive Years of Dividend Growth 11

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Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2018
Total Current Assets $2,324,667,000
Total Current Liabilities $1,040,080,000
Long-Term Debt $1,436,746,000
Total Assets $4,605,064,000
Intangible Assets $1,399,632,000
Total Liabilities $2,974,337,000
Shares Outstanding (Diluted Average) 131,350,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $0.98
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 $1.04
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

Flowserve Corp Valuation – February 2018 $FLS
Flowserve Corporation Valuation – May 2016 $FLS
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

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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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