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Flowserve Update: Good Enough for a Tweak
05/02/2014 5:45 pm EST
Even though this company only reported earnings 3 cents above the Wall Street consensus, their discipline and exposure to the global market for water infrastructure is enough for MoneyShow's Jim Jubak to slightly raise his target price, as of today, May 2, 2014.
I’d call it a “good enough” quarter.
On April 23, Flowserve (FLS) reported earnings of 78 cents a share, 3 cents a share above the Wall Street consensus. Excluding one-time items from both the 2014 and 2013 quarters, earnings per share climbed 17.2% from the first quarter of 2013. Revenue of $1.07 billion was down 2.6% year over year and short of the $1.14 billion Wall Street projection. The company confirmed guidance for 2014 of $3.65 to $4.00 a share. (The Wall Street consensus is $3.93.) In its guidance, the company projected revenue growth of 3% to 6% in constant currency terms.
Frankly, I wish that the company had felt comfortable pushing guidance higher because it’s the near future that gives me a little pause here. New order bookings of $1.19 billion were just 0.3% (or 2.3% in constant currency) higher. It looks like, with some big projects now in the backlog at Flowserve’s engineering and construction sectors, customers are likely to hit the bookings list at Flowserve in the second half of 2014, but the timing on big energy projects remains uncertain. Aftermarket bookings did much better—as has been true for a lot of industrial equipment and infrastructure companies in the current economy—increasing by 8.2% (or 10.8% in constant currency). That improvement in the aftermarket seems to be the result of companies—especially European companies—finally deciding that they can’t put off critical maintenance any longer.
Still, Flowserve did what good companies do during tough markets. It cut costs and pushed gross margin up by 1.3 percentage points to 35.3. Operating margins, excluding one-time items such realignment costs, climbed 1.2 percentage points from the first quarter of 2013 to 14.3%. Those moves, plus those realignments and an asset sale or two, are projected by Credit Suisse to raise return on invested capital to 20.69% in 2014 and 22.40% in 2015, from 18.96% in 2013.
At a forward PE ratio of 18.9 times projected 2014 earnings per share, Flowserve isn’t especially cheap—but then, it never is. You’re paying here for a disciplined company with big exposure to the global market for water infrastructure. The PEG ratio (PE to Growth rate) is just 1.28, which seems a reasonable price to pay for that growth profile.
Flowserve is a member of my Jubak’s Picks Portfolio. As of May 2, I’m tweaking my target price to $90 a share by March 2014—a potential 24% gain from the $72.87 close on May 1—from the previous target of $88. The shares pay a dividend of 0.87%.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Flowserve as of the end of March. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.
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