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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| ModernGraham tagged articles | Morningstar |
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| GuruFocus | SEC Filings |
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:
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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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