Tactical Growth And Synergies Poised To Enhance Profitability In Power Markets

Key Takeaways

• Operational efficiencies and strategic programs aim to enhance product margins, drive consistency, and increase overall earnings.
  
• Acquisitions and growth in power markets, particularly nuclear, are expected to boost revenue and long-term financial stability.
  
• Strategic integrations and regulatory changes pose risks to margins and revenue growth, despite efforts in cost synergies and system improvements.

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 implementation of the new Flowserve business system and operational excellence program is expected to drive delivery consistency, shorten lead times, and enhance product margins, potentially increasing net margins and earnings.
  
• The comprehensive portfolio excellence program aims to simplify offerings and enhance profitability, targeting a 100 to 200 basis point margin improvement by 2027, expected to improve net margins.
  
• The acquisition of MOGAS Industries is anticipated to complement Flowserve’s existing product lines, with $15 million in cost synergies by the end of Year 2 and incremental revenue synergies, contributing to future revenue growth and earnings.
  
• Growth in the power markets, particularly nuclear, is expected due to macro factors supporting increased demand for electricity. This growth could drive both revenue and aftermarket sales, improving long-term revenue stability.
  
• Flowserve's strong aftermarket business, driven by high levels of service and capturing a larger share of the installed base, is expected to continue to grow, improving revenue and potentially boosting net margins through higher-margin service offerings.

Flowserve Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Flowserve's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 10.7% in 3 years time.
• Analysts expect earnings to reach $566.4 million (and earnings per share of $4.52) by about November 2027, up from $267.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2027 earnings, down from 29.4x today. This future PE is lower than the current PE for the US Machinery industry at 24.6x.
• Analysts expect the number of shares outstanding to decline by 1.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

Flowserve Future Earnings Per Share Growth

Risks

• The integration of MOGAS Industries, while strategically beneficial, involves a thorough plan to achieve $15 million of cost synergies, which carries execution risk. This could impact net margins if not handled effectively.
  
• Despite progress in the Flowserve business system and portfolio excellence, complexity reduction efforts may not yield expected improvements, impacting long-term profitability and margin targets.
  
• The discrete $12 million charge due to actuarial assessment of undiscounted long-term liabilities and related tax impacts presents uncertainties that might continue to temper earnings.
  
• The ability to maintain the streak of over $1 billion in orders each quarter could lead to challenges if market conditions shift, impacting future revenue growth expectations.
  
• Potential regulatory changes in energy projects, particularly in the oil and gas sector, could influence customer spending and pose a risk to projected sales and bookings in these markets.

Valuation

• The analysts have a consensus price target of $63.2 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 $72.0, and the most bearish reporting a price target of just $55.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.3 billion, earnings will come to $566.4 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $59.9, the analyst's price target of $63.2 is 5.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.