All these positive estimate revisions caused Flowserve's Zacks rank to jump up to 1, putting the company among the top 5% of all companies measured in terms of earnings momentum. According to Dan Fitzpatrick, as of last Friday the technicals supported a buy (with appropriate risk controls.)
As with most stock ideas, Flowserve has some downside risk, particularly with regard to valuation levels. In particular, its 1.8% free cash flow yield is below the yield on Treasuries, meaning that a good deal of the return must come from growth. There are several names that offer similar growth and higher free cash flow yields, particularly among the software companies I look at. Still, I think there could be benefit to owning Flowserve for diversification purposes.
Its 19 times forward P/E ratio isn't among the cheapest available, and is toward the high end of the 8 to 24 times range at which Flowserve has traded over the last five years. Its price/book ratio is also significantly higher than those of its peers. I would not be at all surprised to see the valuation contract in the short term, and I am virtually certain it will contract in the longer term.
But taking the valuation ratios down to the five-year average over the next five years would knock about 4-5% per year off the return, by my estimates. Given the 20% annual expected growth rate over that period, that still leaves room for annual returns of 15% or so, which I think will far outpace the S&P 500 over that time.
Investing A KO From Coke 2/13/2008 12:23 PM EST The company reported earnings of 52 cents per share on revenue of $7.33 billion.
Investing Insider Purchases & Buybacks: ETFC 2/13/2008 10:57 AM EST Despite some buying, I'd steer clear until the company gets on the right track.
Investing IRA Investing: Getting Positioned 2/13/2008 9:42 AM EST My cash target sits at 40%, so I'm ready to move when this market shows leadership.
At the time of publication, Trent had no positions in the stocks mentioned, although positions may change at any time.William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.
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