A Member of Pat McKeough’s Inner Circle recently asked for his advice on Flowserve, a precision engineering company that specializes in flow control equipment.
Pat likes the company’s ability to resolve its supply chain and related issues. Its impressive backlog also suggests there’s more growth to come. However, he notes that the company needs a sustained economic recovery to keep reporting higher sales and profits.
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Flowserve Corp. (Symbol FLS on New York; www.flowserve.com) manufactures industrial pumps, valves, and other machinery for several industries that use difficult-to-handle or corrosive fluids. These include power utilities, oil and gas, chemical and related firms. It operates facilities in more than 300 locations worldwide, selling its products in about 50 countries.
In February 2023, Flowserve said that it would acquire Velan Inc. (symbol VLN on Toronto), a Montreal-based manufacturer of industrial valves. Founded in 1950, Velan had 12 production facilities in North America, Europe and Asia. Industries that used its valves included oil and gas, mining, water and wastewater, pulp and paper, and many more.
Flowserve planned to pay $245 million cash for the company. Velan had annual sales of about $516 million.
However, in October 2023, FlowServe announced that the French Ministry of Economy, as part of its Foreign Direct Investment review process, had rejected its acquisition of Velan. As a result, Flowserve terminated the arrangement agreement. According to the terms of the transaction, no termination fee was payable by either party.
Flowserve’s revenue rose 2.9%, from $3.83 billion in 2018 to $3.94 billion in 2019. In 2020 during the pandemic, it then dropped 5.5% to $3.73 billion. In 2021, revenue fell a further 5.0% to $3.54 billion. That was due to lower sales to oil and gas customers. Global supply chain, logistics, and labour disruptions due to COVID-19 also hurt Flowserve’s international operations. In 2022, revenue climbed 7.0% to $3.62 billion as pandemic restrictions eased.
Excluding one-time items, Flowserve’s earnings climbed 25.6%, from $230.3 million, or $1.75 a share, in 2018 to $289.2 million, or $2.20 a share, in 2019. Earnings slumped in 2020, along with revenue, by 19.8% to $232.0 million, or $1.77 a share. In 2021, earnings fell a further 21.9% to $181.2 million, or $1.38 a share. In 2022, earnings dropped 46.3%, to $144.4 million, or $1.10 a share. The company continued to struggle with much higher costs and supply chain issues, including disruptions caused by parts shortages for some of its high-profit-margin products.
Inner Circle: Flowserve’s revenue and earnings are up sharply and so is the order backlog
Meanwhile, in the quarter ended March 31, 2023, Flowserve’s revenue rose 19.4%, to $980.3 million from $821.1 million a year earlier. Revenue was higher due to strong performances from its Original Equipment (up 24.1%) and Aftermarket (20.7%) segments.
Flowserve finished the quarter with a backlog of $2.8 billion. That was up 155.1% from $795.1 million a year ago.
Excluding one-time items, earnings rose to $52.6 million, or $0.40 a share, in the quarter. That was up sharply from $9.6 million, or $0.07, a year earlier.
Flowserve’s outlook is positive—although it needs a sustained economic recovery to keep reporting higher sales and profits.
The stock yields 1.8%.
Recommendation in Pat’s Inner Circle: Flowserve Corp. is a hold.
