The global economy is signaling a solid recovery this year, with mass COVID-19 vaccination programs picking up their pace and long-term Treasury yields on the rise. As a result, investors have begun to engage with cyclical stocks, such as consumer discretionary and industrials, that may deliver solid upside in-part because of a style rotation by investors.
A case in point, Flowserve Corporation (FLS), one of the world’s leading industrial machinery providers, is benefiting immensely from its diversified product portfolio and various end-market applications. FLS produces engineered and industrial pumps, seals and valves as well as a range of related flow-management services. In fact, FLS recently provided its products to Pfizer (PFE) to support its production and expand its capabilities regarding its COVID-19 vaccine.
The stock has returned a whopping 93.2% over the past year, compared to the S&P 500’s 69.8% gains. However, we believe that the market has not yet priced FLS’ true potential, and that the stock is largely undervalued currently.
Let’s take a closer look at why FLS could be a solid value investment:
Innovative Product Pipeline
In January , FLS launched a revolutionary IoT service suite, RedRaven, to help industrial production facilities monitor assets remotely, predict equipment failures and take preventive measures to avoid business disruptions. The new platform is designed to support flow control equipment regardless of manufacturer, opening the door for companies to quickly realize the full benefits of Internet of Things (IoT) and predictive analytics absent major infrastructure changes. According to Deloitte, Industrial IoT (IIoT)-based predictive maintenance solutions are expected to reduce factory equipment maintenance costs by 40%.
Impressive Recent Financials
In the fourth quarter (ended December 31, 2020), FLS generated a top-line revenue of $985.3 million, increasing 6.6% sequentially, driven by a rise in both original equipment sales and aftermarket sales. Its total bookings for the quarter were $825.1 million, an improvement of 2.35% from the prior quarter. The company reported adjusted gross and operating margins of 30.7% and 11.3%, respectively. Notably, FLS had a backlog of $1.9 billion at year’s end. FLS delivered adjusted EPS of $0.53, compared to the quarter-ago value of $0.50.
Slated Growth for 2021
Despite pandemic-induced market headwinds over the past year, FLS accelerated its Flowserve 2.0 transformation cost reduction initiatives and reduced the business’s costs by more than $100 million during 2020. This year, FLS’ management aims to return its focus to the growth and optimization aspects of its Flowserve 2.0 agenda. In a fourth-quarter letter to shareholders, CEO R. Scott Rowe wrote, “Innovation and new product development are key aspects of our growth strategy, and we expect to build upon the momentum we achieved in 2020, which included 21 commercial launches of new, redesigned or upgraded products.”
In terms of its trailing-12-month p/e ratio, FLS is currently trading at 22.63x, 8.7% below the industry average 24.77x. In terms of trailing-12-month p/s ratio, FLS’ 1.40x is lower than the industry average 1.66x.
POWR Ratings Indicate Promising Prospects
FLS has an overall B rating, which equates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, FLS has a Value Grade of B, evident from the stock’s lower-than-industry valuation ratios discussed here.
FLS has a B grade for Growth also, which is consistent with analysts’ expectations of robust financial growth. Of the 88 stocks in the A-rated Industrial – Machinery industry, FLS is ranked #36.
Beyond what we’ve stated above, we also have given FLS grades for Momentum, Stability, Sentiment, and Quality. Get all the FLS ratings here.
If you’re looking for other top-rated stocks in the Industrial – Machinery industry, with an Overall POWR Rating of A or B, you can access them here.
FLS is poised to benefit from the mass coronavirus vaccination drive, increased global mobility, stability in commodity prices, and the pent-up demand for its parts and services for existing and evolving new infrastructure projects. Its healthy backlog level, innovative product pipeline, strong conversion capability and multi-year Flowserve 2.0 strategy could enable the company to increase its margins with efficient cost management and higher productivity.
Analysts expect FLS’ EPS to improve at an average rate of 7.5% over the next five years. In fact, its Average Broker Rating of 1.96 indicates favorable analyst sentiment. Of the 14 Wall Street analysts that rated the stock, none has given it a Sell rating. Hence, we believe FLS is a good bargain now.
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FLS shares were trading at $37.92 per share on Tuesday morning, down $1.54 (-3.90%). Year-to-date, FLS has gained 2.90%, versus a 4.90% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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