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NYSE:FLS
News Analysis date published New: 
Monday, April 7, 2014 - 15:00
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Monday, April 7, 2014 - 15:00
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Monday, April 7, 2014 - 15:00

This 'Boring' Energy Side Play Could Pop 13%

Tuesday, April 08, 2014 7:00 AM

In his book "One Up On Wall Street," Peter Lynch said that he loved "boring" stocks because they were often overlooked by the excitement-seeking crowd. And it doesn't get much more boring than today's pick.

The company is a leading and highly profitable producer of fluid motion and control products in over 50 countries. It produces pumps, seals and valves for the oil and gas, chemical, water and power industries. Nothing exciting there, but both the technicals and fundamentals say the stock is an excellent trading opportunity.

Flowserve (NYSE: FLS) pumps have some high-profile uses, such as making snow for ski hills at the Sochi Olympics. But the company's bread-and-butter products are monitoring controls, valves and seals used in oil and gas exploration, from the ocean floor to the Canadian oil sands.

Making the stock even more likely to fly below the radar is that management has been scaling back operations to sharpen its focus on key revenue-generating segments.

In late March, Flowserve announced the divestment of its all-welded ball valve product line, Naval OY. The business was sold to a Finnish valve manufacturer for an undisclosed sum. The company also recently sold a manufacturing facility in Finland and a service center in Russia. Management intends to concentrate on building its core portfolio of pumps, valves and seals. Through "disciplined capital allocation," the board said it expects the company can achieve strong growth.

Flowserve expects to generate between $7.2 billion and $8 billion in revenue by 2018, up from just shy of $5 billion in 2013. Driving this projected growth is increased demand for both the company's original equipment and aftermarket parts, especially items like liquid control valves and pumps used in energy infrastructure.

With global energy demand expected to continue rising, demand for Flowserve's energy-based pipes, valves and seals should also grow. The company plans to continue to expand in emerging markets with key growth targets being Brazil, Russia, India, China and the Middle East.

The technical picture is bullish.

Rising off a June 2012 low near $32 (split-adjusted), shares almost doubled in less than a year, steadily rising to the mid-$50s by March 2013. The stock then traded in a rectangular consolidation pattern marked by support near $50 and resistance around $57.

In late September/early October 2013, FLS broke out of the rectangle and reached the high $70s late in the year. An accelerated uptrend line can be traced to the breakout.

After retreating to just under $70 in January, FLS again surged, reaching an all-time high above $82 in late February. Shares have since retreated slightly but are holding above a nearby shelf of support at $72.75, a previous resistance level.

If FLS can successfully penetrate its $82.24 peak, shares should move higher since there would be no overhead resistance. Analysts project the stock could go as high as $93, but the more conservative median target is $88. At current levels, this represents 13% potential returns.

The bullish technical outlook is supported by solid fundamentals. For the upcoming first quarter, to be reported in late April, analysts project revenue will increase 4% year over year, to $1.1 billion. For the full 2014 year, they expect a 5.5% increase to $5.2 billion.

The earnings outlook is similarly strong. Analysts expect first-quarter earnings will increase 12% from a year ago, to $0.75 per share. Full-year 2014 earnings are projected to jump 15%, to $3.93 a share.

In addition to a strong technical and fundamental outlook, the company is committed to providing shareholder value through share repurchases and dividend increases. By the end of 2013, it had repurchased over $384 million of stock, and future share repurchases are likely.

Flowserve's board also recently authorized a quarterly cash dividend of $0.16 per share, a 14% increase from the $0.14 per share paid in January 2014. Dividend payments have consistently increased since 2007, and this should continue as earnings rise. This, along with the share repurchases, should help set a floor under the stock price.

Risks to Consider: Oil and gas prices are notoriously volatile and closely tied to global economic growth. A recession could prompt Flowserve's customers to postpone needed capital investments. That said, the company offers a variety of products for a number of industries and caters to several markets across geographic areas. With this diversity, it should continue to prosper.

Action to Take -->
-- Buy FLS at the market price
-- Set stop-loss at $69.85, just below the major trendline
-- Set price target at $87.99 for a potential 13% gain by fall 2014

This article was originally published at ProfitableTrading.com:
This Stock May be Boring, but the Profit Potential Isn't

Melvin Pasternak does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.