One of the leading global manufacturers of industrial pumps and valves, including fluid-motion and -control products, Flowserve's largest customers are the oil and gas companies, which accounted for 36% of bookings in 2009. Power-generation companies are also big customers, contributing 20%, as well as industrials, 19%; chemicals, 18%; and water treatment companies, 7%.
The stock had been trading at around $120 a share when it got struck down after the BP oil-spill catastrophe. Along with BP's stock, shares of Flowserve were among those that got severely pounded. It tumbled to a 52-week low of $81, but it has since almost fully recovered.
Providing Vital Services
The stock's decline was more due to its association with the energy industry than its dependence on BP for business. So, seven months later, the stock has shot up to $105 on Nov. 23. And close Flowserve watchers believe the shares will continue to surge, perhaps climbing as high as $130 in 12 months.
"Although its stock got whacked, partly because it's a big energy play, the gigantic oil spill didn't much hurt Flowserve's earnings," says G. Russell Croft, portfolio manager at Croft Funds, which took the opportunity of buying more shares at cheaper prices. Flowserve is "tops in its space, so the stock continues to be inexpensive at its current price levels," says Croft, who sees it hitting $130 in a year. "It's the largest pure-play flow-control company," he says. Flowserve's services are vital to the giant petroleum, chemical and power-generation industries, says Croft.
During the third quarter, the Gulf oil spill wasn't as much of a downer as the recession was. The tepid economic recovery has reduced bookings, slowed revenues and crimped margins, note analysts. Flowserve posted disappointing earnings for the quarter, in which overall sales tumbled 6% from a year ago, adding more downward pressure on margins and prices.
But analysts predict a positive turn before long. "The outlook implies improving trends from the third-quarter slump," says Michael Halloran, analyst at investment Robert W. Baird, who notes that management's positive guidance for the fourth quarter "supports material sequential improvement in both revenue and margins from third-quarter levels."
The company's positive long-term thesis is largely unchanged, says Halloran, and "we remain long-term buyers." His optimism for the long haul is based on what he sees as the company's "exposure to positive secular drivers (oil and gas, power, water and wastewater) and potential for upward earnings revisions as orders accelerate, aftermarket trends remain strong, pricing normalizes, and margin improvement becomes more evident."
Although he's pretty much aware of near-term headwinds, including decelerating order trends and pricing pressure, Halloran says he's maintaining his rating of outpeform for Flowserve. He notes that it has one of the largest exposures to global infrastructure spending in the process-control universe.
Upbeat on Long-Term Demand
At its current price levels, the stock appears oversold, according to Charles D.Brady, analyst at BMO Capital Markets. "We view the valuation as compelling, and we reiterate our outperform rating," he says. He has a 12-month price target of $130, which assumes Flowserve will trade at nine times his estimated 2011 earnings before interest, taxes, depreciation and amortization (EBITDA) estimate of $840 million, on estimated revenues of $4.64 billion.
The strength in the shale-gas market and liquefied natural gas (LNG) projects has significantly improved bookings this year, notes Brady. That has made management upbeat about the long-term demand for the company's various end markets. As an example, oil and gas year-to-date have accounted for 41% of bookings, up from last year's 36%.
Flowserve could appeal to investors looking for a more diversified investment opportunity in energy, including a participation in global industrial and infrastructure rebuilding programs.