3D Strategy Will Capitalize On Energy Transition And Global Trends

Key Takeaways

• Strategic focus on diversification, decarbonization, and digitization aims to grow revenue by leveraging energy transition and global trends.
  
• Acquisitions and aftermarket prioritization should enhance market exposure and improve both revenue and net margins.
  
• Currency headwinds, acquisition costs, soft market conditions, and geopolitical tensions pose challenges, while execution risks in complexity reduction could affect margins and revenue.

Catalysts

Designs, manufactures, distributes, and services industrial flow management equipment in the United States, Canada, Mexico, Europe, the Middle East, Africa, and the Asia Pacific.

• Flowserve's strategic focus on the 3D strategy—diversification, decarbonization, and digitization—is expected to drive growth by capitalizing on energy transition and global regionalization trends, potentially increasing revenue.
  
• The company is prioritizing its aftermarket business, increasing capture rates from its large installed base, which should enhance both revenue and net margins due to higher margins in aftermarket services compared to original equipment.
  
• The recent acquisition of Mogas is anticipated to expand Flowserve's offerings and market exposure, particularly in mining and minerals, enhancing diversification and contributing positively to earnings.
  
• The ongoing operational excellence and portfolio management initiatives, like the 80/20 complexity reduction program, are expected to drive gross margin expansion by simplifying processes and optimizing offerings, improving net margins.
  
• Investment in innovation and technology, including cryogenic pumps for LNG, is aimed at enhancing product differentiation, supporting long-term revenue growth as these solutions are deployed in rapidly growing market sectors.

Flowserve Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Flowserve's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 10.3% in 3 years time.
• Analysts expect earnings to reach $527.3 million (and earnings per share of $3.98) by about April 2028, up from $282.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.1x on those 2028 earnings, up from 19.7x today. This future PE is greater than the current PE for the US Machinery industry at 19.9x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.7%, as per the Simply Wall St company report.

Flowserve Future Earnings Per Share Growth

Risks

• The strengthening U.S. dollar presents a currency translation headwind, possibly impacting Flowserve's revenue and earnings given their global operations.
  
• The Mogas acquisition and associated interest expenses have created potential for higher costs, which could impact net margins until synergies are realized.
  
• The chemical industry in Europe remains soft, posing a risk to revenue growth in that key market segment.
  
• Tariff implications due to geopolitical tensions could lead to increased supply chain costs, affecting Flowserve's cost structure and potentially reducing net margins.
  
• Complexity reduction through SKU management entails execution risks that could disrupt existing customer relationships and potentially lead to short-term revenue dips before the anticipated margin gains are realized.

Valuation

• The analysts have a consensus price target of $64.3 for Flowserve based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $80.0, and the most bearish reporting a price target of just $50.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.1 billion, earnings will come to $527.3 million, and it would be trading on a PE ratio of 20.1x, assuming you use a discount rate of 7.7%.
• Given the current share price of $42.19, the analyst price target of $64.3 is 34.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.