Flowserve (FLS): Capitalize on Energy’s Strong Upswing

One of investors’ great challenges during bull markets is finding stocks with attractive fundamentals that have not yet had their day in the sun. Fortunately, the business cycle delivers a natural ebb and flow of corporate success stories.

Once energy prices establish a steady uptrend, as they did decisively in the second half of 2017, the oil and gas industry kicks into high gear, expanding operations and spurring business growth in all corners of the world. Companies that serve the energy sector then experience revenue growth, and if they’re well run, profit growth follows.

Today I’d like to introduce a company that derives about a third of its revenue from the energy sector, and is on track for a surge in net income in the coming years.

Flowserve Corporation (FLS) is a supplier of precision-engineered fluid motion and control products and services, including pumps, valves and seals. Aftermarket services include installation, advanced diagnostics, repair and retrofitting. Flowserve serves companies that are involved with infrastructure projects, and operates in all major global geographic areas. The company is focused on organic growth, operational excellence, cost controls and expansion into emerging markets.

Flowserve thrives later in the business cycle. The oil and gas industry makes up the largest portion of Flowserve’s customer base. It’s a well-established trend that the energy industry is on a strong upswing, with rising oil prices and a higher rig count. Exploration and production stocks responded well in 2017, while oilfield service stocks began rising in December.

As the energy sector heats up, Flowserve’s profit trend is changing from lackluster to exciting. Consensus earnings estimates for Flowserve do not vary often, although 2018 and 2019 estimates have been rising during the last four weeks. After a down year in 2017, Wall Street is expecting earnings per share (EPS) to rise 35.0% and 19.4% in 2018 and 2019. The 2018 price/earnings ratio (P/E) is 23.8, which is much lower than the earnings growth rate, suggesting that the stock is undervalued.

Flowserve will participate at Gabelli & Company’s 28th Annual Pump, Valve & Water Systems Symposium on February 22. Wall Street analysts will likely tweak their earnings estimates and publish new research reports in the following days, generating increased trading in FLS shares through their client bases.

FLS is a mid-cap stock with a $5.8 billion market capitalization and heavy institutional ownership. Investors receive a study $0.19 per share quarterly dividend, with a current yield of 1.7%.

The stock has been rising, and is likely to surpass short-term price resistance at 45 in the very near future. At that point, I expect FLS to rise to 51, where it traded repeatedly in recent years. Buy FLS now for a potential 10%-15% short term capital gain. Given a neutral-to-bullish stock market, FLS could rise above 51 in the second half of 2018.

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