Company Spotlight - Flowserve Corp. (FLS-NYSE)

  Pumping Profits

January 31, 2008 - Flowserve Corporation (FLS-NYSE) stays pumped up about fluid-handling equipment. The company makes pumps, valves, and mechanical seals. The acquisition of Ingersoll-Dresser Pumps (IDP) from Ingersoll-Rand in 2000 made Flowserve the world's largest provider of pumps for the chemical, petroleum, and power industries. Flowserve's flow solutions division offers mechanical seals, sealing systems, and repair services to OEMs that make pumps, compressors, and mixers. Its flow control division makes valves, actuators, and related equipment that control the flow of liquids and gases.

There's every reason to have confidence in the earnings projections. Company backlog was up 39% for the first 9 months of 2007, ensuring business for at least the next year or two. Another reason: cost cutting. Selling, General & Administration expenses (SG&A) were only 23.5% of sales for the first nine months of last year, down from 25.5% the previous year. The weak dollar is also contributing as foreign sales increase. One last note: foreign tax rates were lower last year which increased margins.

The fact that the company is selling more pumps helps a great deal as well. Sales for the first nine months of 2007 were $3.2 billion, up 19% from the same period in 2006, without currency effects, 17.6%.

More help is coming from the lower debt load the company carries. By the end of 2007, it should only be about 50% of the level from 2006. Heavy indebtedness occurred when the company made 2 large acquisitions in 2000 and 2002, financed by selling stock and adding debt. Using its strong cash flow, the company paid down quite a bit of that (though debt is still 32% of capitalization), started a dividend (45 cents for 2007), and bought back shares, mostly to offset the exercise of stock options by officers and directors. With lower debt and strong cash flows, look for a possible increase in dividends, more stock buybacks, or maybe an acquisition.

More numbers: Market Cap is $4.9 billion on 57.14 million shares. Earnings are predicted to grow by 22% a year, on average, for the next 5 years while revenues are forecast to increase by 9.5% annually, on average. Return on Equity should hit 19% this year, up from 11.2% last year. Net proft margin was 3.7% in 2006 with expectations of 6.3% last year and 6.9% this year. Foreign sales were 60% of 2006's total revenues.

Flowserve has had a great run with a promising future. Orders are up, backlog is high, efficiencies are showing up in the bottom line. Management is doing a good job with the capital it manages. This stock is worthy of more time by any investor looking for growth.

- Company Web site: www.flowserve.com

- James Hale