Is Flowserve Trading at a Discount Compared to Its Peers?
Valuation of Flowserve
Since 2013, FLS’s revenue has fallen at a CAGR (compound annual growth rate) of 4.1% on account of broad end market weakness in energy, chemicals, and industrials. Being an industrial company, FLS’s performance is related to the performance of the larger economy.
Flowserve’s business is cyclical because when the economy is booming, it will secure robust orders and execute them. Its cost saving efforts will also trigger further growth. Thus, its earnings are affected in both slow-growing and booming economies.
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FLS’s management has guided for a 7%–14% revenue fall in 2016. Following the company’s 2Q16 results, FLS’s management has lowered the upper end of its EPS (earnings per share) guidance to $2.60 from $2.75. Industrial stocks are generally valued on the basis of their EPS.
Shares of Flowserve are currently trading at a PE (price-to-earnings) multiple of 18.07x. This isn’t cheap compared to FLS’s peers and the industrial sector. The average PE multiple for industrial companies in XLI is 16.52x.
FLS is trading at a one-year forward PE multiple of 18.09x. In comparison, Pentair, Cameron, Emerson, and Crane are trading at multiples of 14.58x, 21.03x, 17.83x, and 14.82x, respectively.
Flowserve and its peers
FLS isn’t cheap compared to its peers. As a flow control equipment player, it enjoys a first-mover advantage regarding relationships with customers and technologies that are difficult to replicate.
FLS has a market share of 4%. It has plans to increase its market share, but right now, its management expects its sales to fall by 7%–14% in 2016.
As per data released on August 1, 2016, Flowserve’s stock has fallen by over 1.6% in the last 12 months, while the SPDR S&P 500 ETF (SPY) has risen by 3.0% during the same period.
In the next article, we’ll take a look at analysts’ recommendations for Flowserve.