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  • Manufacturing plants locations: 8 in Americas, 10 in Latin America/Asia, 12 in Europe
  • Manufacturing plants locations: 8 in Americas, 10 in Latin America/Asia, 12 in Europe
  • Contracts:
  • Fls Final Powerpoint

    1. 1. Flowserve Corporation (NYSE: FLS ) INDUSTRIALS GROUP Andrew Yoon 2009 GPS Fall Conference October 2, 2009
    2. 2. Table of Contents Table of Contents i) Business Description ii) Porter’s 5 Forces iii) SWOT iv) Competitors v) Key Drivers & Catalysts vi) Valuation vii) Investment Recommendation
    3. 3. Business Description Business Description <ul><ul><li>Flowserve Corporation is a manufacturer and aftermarket service provider of flow control systems. </li></ul></ul><ul><ul><li>Flowserve operates in three different segments, each responsible for a different product line: </li></ul></ul><ul><ul><ul><li>Flowserve Pump Division (pumps) </li></ul></ul></ul><ul><ul><ul><li>Flow Control Division (valves) </li></ul></ul></ul><ul><ul><ul><li>Flow Solutions Division (seals) </li></ul></ul></ul><ul><ul><li>Aftermarket servicing includes installation, repair, and retrofitting. These services are provided through Quick Response Centers (QRCs), of which there are 150 located throughout the world. </li></ul></ul>
    4. 4. 1) Flowserve Pump Division Business Segments <ul><ul><li>Designs, manufactures, distributes and services pumps, pump systems, replacement parts, and related systems. </li></ul></ul><ul><ul><li>Pumps are used to move fluids through piping systems. </li></ul></ul><ul><ul><li>World’s largest supplier of pumps to oil and gas, chemical, and power generation industries. </li></ul></ul><ul><ul><li>Portfolio of more than 150 differ e nt pump models </li></ul></ul><ul><ul><li>30 manufacturing plants and 79 QRCs located worldwide </li></ul></ul><ul><ul><li>Independent industry sources say FPD is 3 rd largest pump manufacturer in the world. </li></ul></ul>
    5. 5. 2 ) Flow Control Division Business Segments <ul><ul><li>Designs, manufactures, distributes, and services valves, actuators (device for moving or controlling a system), and automation systems. </li></ul></ul><ul><ul><li>These products are usually custom-designed for a customer’s needs. </li></ul></ul><ul><ul><li>FCD’s products are used to manage the flow of liquids and gases by opening, closing, or partially obstructing various passages. </li></ul></ul><ul><ul><li>48 manufacturing plants and 29 QRCs located worldwide </li></ul></ul><ul><ul><li>Independent industry sources say FCD is 3 rd largest industrial valve supplier in the world. </li></ul></ul>
    6. 6. 3) Flow Solutions Division <ul><ul><li>Designs, manufactures, distributes, and services mechanical seals and sealing systems and parts. </li></ul></ul><ul><ul><li>Seals join systems together by preventing leakage. </li></ul></ul><ul><ul><li>FSD’s products are used in a wide variety of high-stress conditions, so they need constant repair or replacement. </li></ul></ul><ul><ul><li>More than 185 models of seals available. </li></ul></ul><ul><ul><li>6 manufacturing plants and 74 QRCs located worldwide </li></ul></ul><ul><ul><li>Independent industry sources say FSD is 2 nd largest mechanical seal supplier in the world. </li></ul></ul>Business Segments
    7. 7. Revenue Mix by Segment   Segment Revenue Breakdown
    8. 8. Operating Income by Segment   Segment Operating Income Breakdown
    9. 9. Geographic Revenue Breakdown Geographic Revenue Breakdown
    10. 10. Industry Bookings Breakdown Industry Bookings Breakdown
    11. 11. Table of Contents Table of Contents i) Business Description ii) Porter’s 5 Forces iii) SWOT iv) Competitors v) Key Drivers & Catalysts vi) Valuation vii) Investment Recommendation
    12. 12. Power of Suppliers <ul><ul><li>LOW </li></ul></ul><ul><ul><li>Many of FLS’s raw materials – bar stock, fasteners, motors, etc – are not custom designed, and therefore available from a wide variety of sources. </li></ul></ul><ul><ul><li>Company is a vertically-integrated manufacturer for necessary custom parts (corrosion-resistant castings for pumps and valves are manufactured by FLS). </li></ul></ul><ul><ul><li>Minimal switching costs in moving between suppliers. </li></ul></ul>Porter’s Five Forces
    13. 13. Power of Customers <ul><ul><li>LOW </li></ul></ul><ul><ul><li>Sell products and services to more than 10,000 companies directly or through designated channels. </li></ul></ul><ul><ul><li>Largest customer in 2007 accounted for 5% of revenue. </li></ul></ul><ul><ul><li>No customer accounted for more than 10% of 2008 revenue. </li></ul></ul><ul><ul><li>Customers have no choice but to repair FLS custom-designed parts to maintain production – little power to negotiate prices. </li></ul></ul>Porter’s Five Forces
    14. 14. Power of Substitutes <ul><ul><li>MEDIUM </li></ul></ul><ul><ul><li>Pumps, valves, and seals are absolutely indispensable parts of fluid control systems. Only FLS will be able to repair or replace custom-made parts. </li></ul></ul><ul><ul><li>Customers cannot put off purchases or repairs in recessionary times. </li></ul></ul><ul><ul><li>However, companies could cut costs by purchasing less sophisticated parts from other manufacturers at minimal switching cost; there isn’t always a need for custom-made supplies. </li></ul></ul>Porter’s Five Forces
    15. 15. Industry Rivalry <ul><ul><li>HIGH </li></ul></ul><ul><ul><li>Pump Division: industry is highly fragmented, with more than 100 competitors </li></ul></ul><ul><ul><li>Control Division: top 25 global valve manufacturers comprise less than 25% of total valve market. </li></ul></ul><ul><ul><li>Solutions Division: less fragmented, larger companies tend to hold more of the market share. </li></ul></ul><ul><ul><li>In aftermarket services market, independent local repair shops can make repairs for non-customized parts due to existence of common standards. </li></ul></ul>Porter’s Five Forces
    16. 16. Barrier s to Entry <ul><ul><li>HIGH </li></ul></ul><ul><ul><li>Much of FLS’s sales through referrals or existing relationships with clients – difficult for a new entrant to compete against reputations of already established companies. </li></ul></ul><ul><ul><li>To build manufacturing plants and service centers, as well as hire experienced personnel, requires extremely large initial capital investment. </li></ul></ul><ul><ul><li>Trademarks and patents held by established companies make it difficult for new entrants to design competing products. </li></ul></ul>Porter’s Five Forces
    17. 17. Table of Contents Table of Contents i) Business Description ii) Porter’s 5 Forces iii) SWOT iv) Competitors v) Key Drivers & Catalysts vi) Valuation vii) Investment Recommendation
    18. 18. Strengths <ul><ul><li>Exposure to wide variety of end industries and countries to hedge against limited risks. </li></ul></ul><ul><ul><li>Strong manufacturing capabilities – as one of the largest companies in its space and manufacturing facilities all over the world, FLS experiences favorable economies of scale. </li></ul></ul><ul><ul><li>Quick Service Centers (QRCs) throughout the world provide competitive advantage: easy to provide quick (usually 24-hour) service to clients around the world. </li></ul></ul><ul><ul><li>A l l parts of FLS’s business are connected – companies building plants will likely need pumps, valves, and seals at similar times. </li></ul></ul><ul><ul><li>Aftermarket servicing is a high margin business that will likely remain stable even in times of economic downturn. These services also help FLS maintain long-term relationships with clients. </li></ul></ul><ul><ul><li>Strong and broad brand portfolio. Custom-designed products make it easy for FLS to tailor to client’s interests. </li></ul></ul><ul><ul><li>Extremely strong fundamentally: gross margin, net margin, ROA, ROE have been growing over time, and dramatically outpace competitors. </li></ul></ul><ul><ul><li>Large backlog of orders waiting to be filled. </li></ul></ul><ul><ul><li>On average, 40% of bookings in a quarter are for servicing requests, which usually need to be filled immediately. </li></ul></ul>SWOT
    19. 19. Weaknesses SWOT <ul><ul><li>Oil and gas industries represent a significant amount of revenue. Stock price has traded with oil in the past – significant exposure to the risks and cyclicality of this industry. </li></ul></ul><ul><ul><li>Backlog is much larger than it has been in the past – company may be “stretching itself too thin,” straining relationships with customers and affecting profitability. </li></ul></ul><ul><ul><li>Bookings can usually be canceled or modified at any time, so they are not necessarily a good indication of future revenue. </li></ul></ul><ul><ul><li>The company uses defined benefit pension plans, some of whic h is not funded (Austria, France, Germany, Sweden). Unfunded pension obligations could affect the bottom line and force the company to funnel cash from R&D, etc to pension plans. </li></ul></ul>
    20. 20. Opportunities SWOT <ul><ul><li>Future demographic trends predict increased demand for FLS products from end markets: </li></ul></ul><ul><ul><ul><li>Oil prices are projected to rise in the long term. As oil gets more expensive, companies can access harder-to-reach oil while still turning a profit; these operations will need more intricate piping and pumping. </li></ul></ul></ul><ul><ul><ul><li>Nuclear power is especially expected to become more popular: by 2008 end, 43 reactors under construction and 372 reactors planned or proposed worldwide. FLS’s “N-stamp” certification, required to service companies in this industry, gives it a competitive advantage here. </li></ul></ul></ul><ul><ul><ul><li>Water consumption has doubled every 20 years and this trend is expected to continue. W i th 99% of the world’s freshwater not easily accessible, will need more complex systems and pumps to reach them. </li></ul></ul></ul><ul><ul><li>Well positioned in developing countries such as China and India, which are expected to expand infrastructure dramatically. </li></ul></ul><ul><ul><li>Contracts with a variety of well-established companies, which will help improve FLS’s brand image and recognition: </li></ul></ul><ul><ul><ul><li>10-year supplier agreement with Saudi Aramco (world’s largest oil company) to provide products and services. </li></ul></ul></ul><ul><ul><ul><li>Exclusive relationship with Petrobras (world’s 7 th largest oil company, recently discovered large oil deposit in Brazil). </li></ul></ul></ul><ul><ul><ul><li>Supplier of valves to Westinghouse Electric Company nuclear power plants in China. </li></ul></ul></ul>
    21. 21. Threats SWOT <ul><ul><li>The industries that FLS competes in are extremely competitive are fragmented, increasing pricing pressures, which may adversely affect the company’s results. </li></ul></ul><ul><ul><li>Increases and volatility in prices of raw materials could negatively impact bottom line. </li></ul></ul><ul><ul><li>65% of FLS’s sales are outside the US, which exposes the company to additional risks: </li></ul></ul><ul><ul><ul><li>Foreign currency exchange fluctuations </li></ul></ul></ul><ul><ul><ul><li>Regulatory and political risks abroad </li></ul></ul></ul>
    22. 22. Table of Contents Table of Contents i) Business Description ii) Porter’s 5 Forces iii) SWOT iv) Competitors v) Key Drivers & Catalysts vi) Valuation vii) Investment Recommendation
    23. 23. Competitors Parker-Hannifin Corporation (NYSE: PH) : Manufactures, services, and distributes a variety of motion and control technologies and systems, including fluid power/control systems. Market Cap: 8.86B. Pentair, Inc. (NYSE: PNR) : Company is made up of two divisions, one of which, the Water Group, provides products and systems used to move, store, and treat water and other fluids. Market Cap: 3.02B. Harsco Corporation (NYSE: HSC) : HSC is structured similarly to FLS – three different divisions (Infrastructure, Metals, Minerals & Rail) which provide products and aftermarket servicing to clients. Market Cap: 2.83B. IDEX Corporation (NYSE: IEX) : Manufactures variety of industrial products, specializing in fluid and metering technologies. Market Cap: 2.31B. Competitors
    24. 24. Table of Contents Table of Contents i) Business Description ii) Porter’s 5 Forces iii) SWOT iv) Competitors v) Key Drivers & Catalysts vi) Valuation vii) Investment Recommendation
    25. 25. Drivers & Catalysts <ul><ul><li>End markets will need to expand infrastructure in the coming years to obtain harder-to-reach resources, thus increasing demand for FLS products (world will need more oil, energy, drinkable water, etc). </li></ul></ul><ul><ul><li>FLS is well-positioned in developing countries like C h ina and India (and is expanding that position by building more QRCs and manufacturing facilities in these areas). As these nations become more wealthy, they will expand their own infrastructure and manufacturing capabilities, and will likely require FLS products to do so. </li></ul></ul><ul><ul><li>Existing strong relationships and exclusive contracts with some of the world’s largest energy companies ensure that FLS can capitalize on these demographic trends. </li></ul></ul>Key Drivers & Catalysts
    26. 26. Table of Contents Table of Contents i) Business Description ii) Porter’s 5 Forces iii) SWOT iv) Competitors v) Key Drivers & Catalysts vi) Valuation vii) Investment Recommendation
    27. 27. Valuation Summary <ul><li>52 Week Range : $3 7.18 – 110.74 </li></ul><ul><li>All Time High: $139.04 (May 2008) </li></ul><ul><li>Discounted Cash Flows: </li></ul><ul><ul><li>Exit Multiple (EV/EBITDA): $ 93.94 – 117.62 </li></ul></ul><ul><ul><li>Perpetuity Growth: $ 101.51 – 119.03 </li></ul></ul><ul><li>Trading Comparables : </li></ul><ul><ul><li>EV/Sales: $ 83.09 </li></ul></ul><ul><ul><li>EV/EBITDA: $ 117.22 </li></ul></ul><ul><ul><li>EV/EBIT: $ 112.24 </li></ul></ul><ul><li>Average of Valuation : $ 90.86 – 115.80 </li></ul><ul><li>Currently Trading : $ 97.82 </li></ul><ul><ul><li>Implied ROI: (7.1) % – 18.4% </li></ul></ul>Valuation Summary
    28. 28. Football Field Football Field Football Field
    29. 29. Key Valuation Assumptions Key Valuation Assumptions 52 Week Range: P/E: 4.87x – 14.49x P/B: 1.3x – 3.88x Discounted Cash Flow: Exit Multiple: 9x EV/EBITDA (Implied terminal growth rate – 4.95%) Perpetuity Growth: 5% terminal growth WACC: 11% (11.1% cost of equity, 5.7% cost of debt) Trading Comparables: Companies Parker-Hannifin Corporation [PH] Pentair, Inc. [PNR] Harsco Corporation [HSC] IDEX Corporation [IEX] Multiples [median] EV/Revenue: 1.1x EV/EBITDA: 9.2x EV/EBIT: 10.0x
    30. 30. Table of Contents Table of Contents i) Business Description ii) Porter’s 5 Forces iii) SWOT iv) Competitors v) Key Drivers & Catalysts vi) Valuation vii) Investment Recommendation
    31. 31. BUY Thesis: Flowserve’s business model of providing high-quality aftermarket servicing to its wide range of products has helped it remain relatively immune to the global economic downturn. Due to demographic changes, worldwide demand for power, oil, and water will increase. Flowserve’s strong position in developing countries such as China and India and partnerships with some of the largest companies in these spaces will ensure that it remains a leader in its field. The company is trading at 15% below its estimated fair value of $110 . With FLS’s strong fundamentals, solid business model, and promising end market growth, this large discount to fair value is a rare buying opportunity .   Key Drivers & Catalysts

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