Flowserve Corporation is a leading manufacturer and service provider of flow control systems and solutions. The company supports industries including oil and gas, chemical, power generation, water management, and general industries. Our thesis was that Flowserve may be undervalued due to a downturn in the oil and gas industry and could expect increased activity as the downturn abates. However, after conducting quantitative and qualitative analyses, we could not reject our thesis but found enough doubt to view Flowserve as not sufficiently undervalued given its risks. Therefore, we would not recommend investing in Flowserve at its current price based on our conservative approach.

1. Flowserve Corporation (FLS)
John Yannone
Professor Anurag Sharma, Ph.D.
University of Massachusetts, Amherst
SCH-MGMT 797VL
VALUE INVESTING
Fall 2016
John Yannone collaborated and contributed to the content of this paper in more or less equal parts except as noted
below.
 John led the effort on Sections A, B and C
For the purpose of this paper we are using Flowserve’s closing share price of $48.24 on October 5, 2016 (the price used
for the quantitative analysis during the thesis development phase of the project). This Price is in the vicinity of the
current market price (early December 2016; see Appendix Cover Page for recent price history).

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3. Executive Summary
Our thesis was that US based Flowserve Corporation may be undervalued due to a downturn in the oil and gas
industry and could expect a ramp up in activity as global growth returns. It is a leading firm (if not the leader)
in the flow control industry, which is an industry that should benefit from global macro trends in the long run.
The drivers of the growth will be population growth, emergence of new cities in emerging economies and
urbanization. This wave of growth in the emerging economies requires a variety of investments in physical
capital creating investment opportunity in companies that aid in the urbanization of those areas. In addition to
the growth in emerging markets, opportunities in developed markets exist in the form of building and updating
current infrastructure.
Flowserve Corporation is a leading manufacturer and service provider of flow control systems and solutions
(pumps, valves, seals, automation and aftermarket services such as installation, advanced diagnostics, repair and
retrofitting). The company supports several global infrastructure industries including oil and gas (~40% of
revenue), chemical (~21% of revenue), power generation (~13% of revenue), water management (~4% of
revenue) and general industries. Products and services are sold to more than 10,000 companies, including some
of the world’s leading engineering, procurement and construction firms and original equipment manufacturers.
The company has manufacturing and service facilities spread throughout the globe and sales are made to the
following geographic regions: North America (~38%), Europe (~20%), Asia Pacific (~20%), Middle East and
Africa (~12%) and Latin America (~10%). We found this company interesting because it has a rich history
dating back to the eighteenth century and is one of the leading companies (if not the leader) in the flow control
industry but only has ~4% market share. It is also a pure play on the industry and could grow irrespective of
global trends by just continuing to increase its market share (see Appendix Executive Summary).
We also looked at ITT Corporation, Metso Corporation of Finland, SPX Flow Inc. and Sulzer Ltd of
Switzerland. As firms already entrenched in this market, we think these companies will benefit from the same
trends as Flowserve. We removed SPX Flow from further consideration due to a short (<10yr) operating
history. We also removed ITT due to <20% of revenues attributed to oil and gas. We also removed Metso
because 73% of revenues were attributed to mining and aggregates.
[paragraph(s) related to sections D, E and F removed]
Another requirement for defensively oriented investors is strength of a company’s competitive position.
Overall the flow control industry appears to be highly competitive. Flowserve is a “leading firm” yet has less
than 4% market share. Since several similar firms (e.g. KSB and Sulzer) have global operations and appear to
offer equivalent high quality products and services, a question for the future is will Flowserve attain a durable
competitive advantage?
Based on current levels, Flowserve does not offer a sufficient margin of safety to warrant investment in the
company. Although Flowserve looks like a historically well-managed business in an industry with good long-
term tailwinds, there was enough doubt revealed during our qualitative analysis and supplemental quantitative
analysis to view the firm as not sufficiently undervalued. With the rejection of our thesis and our cautious
mental orientation, we would not recommend deploying capital for investment in Flowserve at this time.

4. Section A
Our thesis was that Flowserve Corporation is undervalued (P << V) and we believed the market is
undervaluing the firm as "punishment" for a slower 2015 through 2016 amidst a downturn in Oil & Gas
Industry that started in 2014. We thought this was a good thesis because once the downturn in the cyclical oil
and gas industry abates, the firm can expect a ramp up in activity as firms in the industry will need to resume
capital spending on new projects and on plant and equipment already deployed. Furthermore, Flowserve is a
leading firm (if not the leader) in the flow control industry, which is an industry that supplies important
equipment and services to several industries (Oil & Gas, Chemical, Power, Water and Wastewater
Management) that should all benefit from global macro trends in the long run (see Appendix A). The drivers of
this growth will be population growth, emergence of new cities in emerging economies and urbanization. This
wave of growth in the emerging economies will require a variety of investments in physical capital creating
investment opportunity in companies that aid in the urbanization of those areas. In addition to the growth in
emerging markets, opportunities in developed markets exist in the form of replacing and updating current
infrastructure.
As Sharma states in the Book of Value “primacy effect, belief persistence, and confirmation bias
strongly influence what choices we make and how we make them”, so investors must be aware of biases and
take measures to avoid falling prey to them. Our overall research strategy to contain confirmation bias was to
use a systematic process of refutation and disconfirmation (Karl Popper’s falsification approach meets
Benjamin Graham and applied to equity investing). Instead of speculating or trying to verify that Flowserve
was good or bad from unsubstantiated sources and initial impressions, we used conservative orientation and
sound methodical data-driven analysis to develop a deep understanding of the company.
We developed a falsifiable investment thesis (Flowserve) and tried to systematically disconfirm it using
both quantitative data and qualitative analysis. We also used the art of looking by executing tests to try to
disconfirm our thesis and risk rejecting it as an investment candidate.
Also as Sharma states “a large part of investing wisely is to understand and manage the errors that are
inevitable when making decisions under uncertainty” and “investing mistakes are of two kinds: errors of
commission [type I error, pain] and errors of omission [type II error, regret]”. Since these errors are exact
opposites, by using a conservative orientation, we are choosing to increase our chance of making type II errors
so we don’t have to experience loss of capital associated with making type I errors. The way we operationalize
our conservative orientation is by insisting that there be a margin of safety between our estimate of intrinsic
value and the market price when committing capital to investments. If the price is not in our favor we will not
invest or will wait for such a time when the price meets our margin of safety requirement.
We also attempt to avoid “rational herding” by conducting our own research and analysis of necessary
facts using direct sources of information (e.g. annual reports, conference call transcripts and proxy statements)
as much as possible. We also choose to be the few investors performing thoughtful long term analysis by
“carefully evaluating fundamental drivers of economic value”, quoting Sharma.
As value investors we have decided to take a cue from Warren Buffett and the “Superinvestors of
Graham and Doddsville” and take a skeptical view of the efficient market hypothesis. We believe that at times
(sometimes often) there can be a clear distinction between market price (borne of sentiment) and intrinsic value
(determined by a company’s ability to compete and generate high returns on invested capital). When they are
quite different (margin of safety), they can lead to profitable value investment opportunities.

5. Section B1
Flowserve has one bond that matures 11/15/2023, which is shy of our desire to use a 10 year maturity; it
is rated BBB and currently yields 2.855% according to FINRA (this low yield may have more to do with
Flowserve’s interest coverage than with the BBB rating; See Appendix B1-1 for FINRA data and chart showing
correlation between interest coverage and bond ratings). According to FRED (Fed Reserve St. Louis) current
BBB composite yield is 3.35%, so we will use this higher rate to be more conservative. Flowserve’s three year
(2013 – 2015) average earnings per share was $3.06. Using current share price and three year average earnings
per share we calculate an earnings yield (EY) of 6.3%. Using the following equation,
𝑔 =
( 𝑟 − 𝐸𝑌 )
( 1 + 𝐸𝑌 )
we can compute the range of future growth rates implied in the current share price.
Ideally we would like to compare these implied growth rates with the company’s historical growth rate
over the last 5-year and 10-year periods to try to refute the investment thesis. Since there were a few periods,
including 2015, that had negative growth rates we made two adjustments: 1) we did not include 2015, so the
periods were actually 4-year and 9-year; 2) we used Excel’s rate formula instead of the more appropriate
geomean formula. These adjustments resulted in “5-year” and “10-year” historical growth rates of 13.8% and
24.1% respectively. If we had included 2015, the “5-year” and “10-year” historical growth rates would have
been -7.8% and 14.6% respectively. The -7.8% was only due to a decline in EPS that took place in 2015 as a
result of end market deterioration including oil and gas industry. See Appendix B1-2 for Flowserve EPS data.
Over the range of discount rates (6.7% to 10.05%) a long-run annualized growth rate of 4% or less
justified the prevailing price of $48.24/share on 10/5/16. In order to refute the investment thesis, we will
require that the implied growth rate be less than ½ of the lowest historical growth rate calculated above
(13.8%). When we do this comparison for Flowserve, we find the growth rate implied in the share price of
$48.24 is under ½ the historical growth rate pattern for the company's earnings (3.53% is less than half of
13.8% from recent history).
If we hold growth at historical rate of 13.8% (which is usually not a sustainable long-run growth rate),
we can compute the rate at which, given the current price, the market seems to be discounting future growth in
earnings. Using the above equation rearranged:
𝑟 = 𝑔 + ( 1 + 𝑔 )𝐸𝑌 = 21%
This is a high discount rate.
Based on the above we cannot reject the undervalued hypothesis, but we still need to be concerned that
the recent (“5-year”) growth rate was lower than the long term (“10-year”) growth rate and the decline that took
place in 2015. We need to continue the process of negation.
Factor r g
2.0 6.70% 0.38%
2.5 8.38% 1.95%
3.0 10.05% 3.53%

6. Section B2
In addition to our primary thesis we have a subthesis that Flowserve offers attractive yields that we will try to
refute using yield tests.
Using bond rates from FINRA, FRED and Yahoo and 2015 data for Flowserve (except for earnings yield,
where we will use three year average), we present various yields in the following table (we are using corporate
composites because the company does not have 10-year bonds):
10-Year Treasury 1.72% Earnings Yield 6.30%
10-Yr Corporate
AAA 2.27% Dividend Yield 1.58%
10-Yr Corporate
AA 2.35%
Operating Cash
Yield 6.45%
Free Cash Flow
Yield 5.89%
The Earnings Yield is greater than twice the 10-Yr Corporate AA composite rate.
The Dividend Yield is ~63% of the 10-Yr Corporate AA composite rate and almost equivalent to the 10-Year
Treasury rate.
The Free Cash Flow Yield is greater than twice the 10-Yr Corporate AAA composite rate.
Taken together, we cannot reject the subthesis and need to continue the process of negation.

7. Section B3
Another subthesis is that Flowserve has a track record of steady performance that we will try to refute
using stability tests. The goal of these tests according to Sharma “is to look for indications that the company
has sufficient earning power to continue delivering the earnings reflected in the yield tests and maintain the
discrepancy between the historical and implied growth rates.”
First we will calculate several multi-year averages for earnings, dividend and free cash flow, then divide
these by the current market price in order to calculate several multi-year yields.
With the exception of 1-yr value for 2015 EY (a year where earnings declined) all of the numbers in the yield
stability matrix are increasing as the number of years averaged decreased. Also the 3-year earnings yield and
free cash flow yield are more than a factor of 2 greater than the yield on corporate AA composite. Although the
3-yr dividend yield is only ~43% of the yield on AA corporate composite, Flowserve’s dividend has grown
every year for past 10 years, during which time the payout ratio remained below 30%. Taken together, we
cannot reject the subthesis and need to continue the process of negation.
The following is 10 years of operating data for Flowserve:
Note: Refer to the Book of Value Chapter 15 for definitions of abbreviations used in this table
OpM and NM were on average 13% and 9% and seem fairly consistent (they were improving in early
phase and weakened in 2015 amidst the downturn previously described). ROE and ROC have had more
fluctuation, but they have also been high with an average of 22% and 15% respectively. Both showed positive
trends with a good year (2008 when there were high oil prices) and bad year (2015 when there were low oil
prices). A T/O has been fairly consistent hovering around 1 and Inv T/O averaged 5.1 and has seen more
movement (most of the difference from average was in years of very low or very high oil prices). Combined
the stability of historical performance suggests that the earnings power of the company is robust and we cannot
refute the subthesis and need to continue the process of negation.

8. Section B4
Another subthesis is that Flowserve is financially strong that we will try to refute using strength tests.
According to Sharma “we try to refute this subthesis using three sets of metrics: coverage, leverage, and
liquidity. These tests indicate the difficulty a company may have in bearing the costs of borrowed money, the
degree to which assets exceed liabilities, and the extent to which the company may lack cash funds for servicing
debt obligations.”
Since Flowserve’s Market Capitalization is greater than $5 billion, we would like the Conservative
Interest Coverage Ratio to be greater than 8 for an indication of excellent financial health.
Conservative Interest Coverage Ratio = 3-yr average op income / Current year Interest Expense
Since Flowserve’s 3-yr average op income was $692 million and 2015 interest expense was $65 million,
the Conservative Interest Coverage Ratio was 10.6 and indicates excellent financial health. Since 2015
operating income was low ($525 million), Interest Coverage Ratio dropped down to 8.1 (just above threshold).
Next step in trying to refute this subthesis is to understand how much financial flexibility Flowserve has
to weather economic storms by evaluating annual interest payments compared to overall debt burden. The
Debt-to-Equity Ratio at the end of 2015 was 0.98.
Debt-to-Equity = Total Debt / Common Equity
We would like to see this number well below 1 (the lower the better), but it is possible the company is
taking advantage of low interest rates because they can earn much higher returns than the cost of debt (the
Interest Rate Flowserve pays on its debt at the end of 2015 was 4.0%).
Interest Rate = Current Interest Expense / Total Current Debt
The ability (not intent) of a company to pay off all of its debt in less than 5 years is generally a good
sign, so we would like to see the Debt Coverage Ratio less than 5 (years).
Debt Coverage Ratio = Total Debt / Free Cash Flow
Using 3-yr average free cash flow of $340.7 million and total debt at the end of 2015 of $1,631 million,
we calculate a Debt Coverage Ratio of 4.8 (years).
Taken together the strength tests show we cannot refute the subthesis and need to continue the process
of negation.
Next we will, do a “dive for strength” by taking a closer look at the balance sheet and key notes for the
following:
 Operating leases
 Pension and post retirement obligations
 Litigation and lawsuits
 Off-balance sheet liabilities
 Quality of assets
In note 10 of the 2015 10-K, Flowserve provides information about operating leases and indicated they “have
operating leases for certain offices, service and quick response centers, certain manufacturing and operating
facilities, machinery, equipment and automobiles”, the total of which amounts to $216 million with $152

9. million due in next 5 years. Although there is a steady decline in the annual payments, we will use a 5 year
average or $30.4 million and add it to the current interest expense to calculate Fixed Charge Coverage.
Conservative Fixed Charge Coverage = 3-yr average op income / Fixed Charges
Flowserve’s Fixed Charge Coverage is very good at 7.25 and is not much lower than our target of 8 for
Interest Coverage alone. Assuming a discount rate of 5%, we can convert the annual average payment
(assuming constant in perpetuity) of $30.4 million into an equivalent loan of $609 million. If we add this to
total debt, the Debt to Equity Ratio increases from just under 1 to 1.34. We cannot refute the subthesis about
financial strength, but we should be cautious about debt levels going forward.
Flowserve’s has defined benefit pension plans and defined contribution plans for full-time and part-time
employees. The 2015 10-K contains a section titled “PENSION AND POSTRETIREMENT BENEFITS
OBLIGATIONS” and Note 11 titled “PENSION AND POSTRETIREMENT BENEFITS” that provide
information about these plans. The estimated fair market value of all plan assets was $639 million (50%
equity/50% fixed income for US plans and 27% equity/64% fixed income/9% other for non-US plans) at year
end 2015 and the plan decreased in value by $3.1 million from the year end 2014 value. These plans seem to be
conservatively invested (assumptions for long-term rate of return on plan assets for US and non-US were 6.25%
and 5.03%) and none of Flowserve’s common stock is directly held by these plans. The projected benefit
obligation for the defined benefit pension and defined benefit postretirement medical plans were $812.4 million
and $28.6 million respectively at year end 2015. The firm conducts an analysis of the plan by the end of each
year in order to estimate liabilities and expenses for the following year. The three year average of funds
contributed by Flowserve for defined benefit plans was $45 million (which is only 10% of three year average
net income), but the 2016 contribution is expected to drop to $32 million. We cannot refute the subthesis about
financial strength, but we should be cautious about defined benefit obligations going forward.
The 2015 10-K contains a section titled “LEGAL MATTERS AND CONTINGENCIES”. Flowserve is
party to asbestos-containing product litigation for former product they manufactured and/or distributed. They
do not believe there was any significant emission of asbestos-containing fibers from encapsulated internal
components during the use of the equipment. The company has been successful in resolving a majority of
claims with little or no payment and a high percentage of these lawsuits have been covered by insurance or
indemnities from other companies. The company is also involved as a potentially responsible party (among
other financially strong and solvent parties) at five former public waste disposal sites in various stages of
evaluation or remediation and believes that their financial exposure for existing disposal sites will not be
materially in excess of accrued reserves. The firm does not believe there are any other lawsuits that will exceed
accrued reserves (which they only disclose as less than 5% of current liabilities and are evaluated and updated
as necessary and appropriate) or have a material adverse financial impact on the company. Taken together these
lawsuits do not appear to have the potential to threaten future cash flows and we cannot refute the subthesis
about financial strength.
The following phrases were not found in the 10-K “off balance”, “special purpose”, “structured
investment” or “mortgage backed” and there did not appear to be any complex financial arrangements that
could suggest hidden risks.
At year-end 2015, Flowserve’s total assets were $5,103.9 million, total liabilities were $3,402 million and
common equity was $1,684 million (Common Equity = Total Assets – Total Liabilities).

10. Section C
As stated in the Book of Value, “our task is to try to uncover and disconfirm the narrative that the
investment under scrutiny has sound economics intrinsic to it—or that the company underlying the stock is
fundamentally a “good” business.” Another subthesis is that Flowserve is a good business.
In the 2015 10-K Flowserve indicates that they have “maintained [their] previously-announced policy of
annually returning 40% to 50% of running two-year average net earnings to shareholders following attainment
of the previously announced target leverage ratio [1.0x-2.0x total debt to EBITDA].” This suggests a level of
shareholder friendliness that is transparent and meaningful (percentage of average earnings) and not detrimental
to operations (e.g. required attainment of target leverage ratio). This is done through dividends and share
repurchases. Since reintroducing dividends in 2007, the company has consistently paid a quarterly dividend
that has grown an average of 11.3% (geometric mean) per year. Since introducing share repurchases in 2006,
the firm has purchased almost 55 million share for $2.3 billion as of the end of 2015 and the general trend has
been upwards. When considered together, we cannot refute the subthesis and will move on to a look at capital
efficiency.
The following table provides three-year averages of several ratios (primarily ROE, ROA and ROC) and
key factors that show capital efficiency for Flowserve and competing firms (see Appendix C-1 for Flowserve’s
Competitive Landscape).
For the three years ending in 2015, Flowserve, Metso and ITT had used their capital more efficiently
and had higher profitability than Sulzer and SPX Flow as can be seen in the ROE, ROA and ROC and ROS
figures (Metso and ITT showed better numbers in part due to less reliance on Oil & Gas industry than
Flowserve). Flowserve also had higher financial leverage and lower capital leverage than the average of these
firms. Flowserve and Metso had the highest asset efficiencies at 0.95 and 1.02 respectively.
If we compare Flowserve to an aggregate of firms in S&P 500 (*taken by summing key figures for all
firms in the index excluding utilities and financial firms), we see that with exception of profitability (ROS),
which was about the same, Flowserve’s capital efficiency is much better than the overall market as a result of
higher asset efficiency and lower financial leverages.
When considered together and noting there is a target leverage ratio acting as a barrier to taking on more
debt, we cannot refute the subthesis on grounds of capital efficiency using accrual accounting figures and will
move on to a look at cash economics.
As noted in the Book of Value, “in order to be able to disconfirm an investment thesis on the criteria of
good economics, we must also examine how the company gets the cash to finance its operations, how much
cash those operations generate, and what the company chooses to do with the cash so generated”. Appendix C
– 2 shows the economics and cash flows for Flowserve in 2015.
In the fiscal year ending December 2015, Flowserve had revenues of $4.561 billion and reported $267.7
million in net income. Upon making noncash adjustments, the company showed $417.1 million in operating
cash flow. Note that operating cash was 56% more than reported net income. CFFO is usually more than net
income because most companies add back the noncash depreciation and amortization expense to net income

11. during the process of converting from accrual to cash accounting. In 2015, Flowserve added back $99.5 million
and $27.6 million in noncash depreciation and amortization expenses.
Of the $417.1 million CFFO, the company reinvested $181.7 million (43.6%) back into operations
through capital expenditures (CapEx). Note that CapEx is higher than the $99.5 million depreciation expense
during the year. The significant difference between CapEx and the depreciation charge suggests Flowserve is
investing more than necessary to maintain its asset base at current levels of operations; as noted by Sharma
“CapEx greater than depreciation suggests that the company may be expanding its asset base, perhaps to pursue
growth opportunities”. Flowserve also reported net cash outflows of $353.7 million for acquisitions during the
year, which is further indication the company is pursuing growth opportunities.
The next item of note is the dividend payment of $93.7 million (22.5%) of the operating cash flows.
Since Flowserve has almost a decade long record of paying dividends (with dividends increasing by 11.3% per
year over the 2007 to 2015 timeframe), both CapEx and dividends figure in computing the discretionary cash
flows as $141.6 million.
Discretionary Cash Flows = CFFO – CapEx – Dividend
The company spent more than discretionary funds by buying back $303.7 million of its own shares,
paying back $45 million in long-term debt and spending $353.7 million for strategic acquisitions. In order to do
this, the company added $526.3 million of senior note debt and this was done in a period of time with
historically low rates. On a net basis, Flowserve added $481.3 million in debt.
These financing activities were not trivial relative to Flowserve’s size and changed the capital structure
and debt capacity of the company. As noted previously the debt-to-equity ratio was 0.98 at the end of 2015 and
this is double the average of the past 10 years.
From this outline of its financials, Flowserve appears to have had a profitable year despite downturn in
oil and gas industry. It generated more than $417 million in operating cash and along with strategic use of debt
allocated substantial amounts to build for the future; it also returned more than $397 million to shareholders
through share repurchases and cash dividends.
Based on this analysis and the preceding analysis of capital efficiency, we are unable to refute the
subthesis that Flowserve has good economics.

12. [The following three sections have been removed:
 Section D: A History of Flowserve
 Section E: Executives and Compensation
 Section F: Company Chatter
]

13. Last Page
While we believe the tailwinds we identified in our initial thesis paper still apply in the long term, Flowserve
still faces challenges in the short to medium term (e.g. over the next few years) that cast serious doubt on our
thesis that the company is undervalued with a margin of safety to warrant investment at prevailing prices. Our
analysis showed that while Flowserve is a leading business in the flow control industry, the flow control
industry is highly fragmented. It should be noted that all of the companies we looked at in the industry cited the
same tailwinds (more or less) that Flowserve did in shareholder communications and are also experiencing
similar pain (more or less) from the cyclical downturn in the oil and gas industry.
The quantitative analysis was unsuccessful at disconfirmation, but did uncover some areas of concern going
forward. Specifically the 5-yr growth rate was less than the 10-yr growth rate. There were also concerns about
debt levels (especially when factoring in operating leases) and defined benefit contributions going forward.
While we were unable to disconfirm Flowserve as an undervalued investment thesis quantitatively, we were
successful at disconfirming it qualitatively. Our success in disconfirmation was predicated on discussion of
subjective qualitative factors by team members. We decided that we would be more conservative (willing to
make a type II error or loss of opportunity) and only be unsuccessful in disproving the thesis if both team
members were in total agreement (i.e. we would each be willing to buy it for our own accounts). This was
further application of the mental orientation of caution for investing wisely. We also agreed that a margin of
safety must exist in order for us not to refute the investment thesis.
[paragraph(s) related to sections D, E and F removed]
We found it interesting that at the same time we were discussing our disconfirmation of the investment thesis,
the company was reaching new 52 week highs. This prompted us to take another look at Flowserve’s value
using a different method (see Appendix Last Page – 1). Our fair value estimates using Price/EBITDA
suggested that Flowserve is overvalued. The recent merger deal between GE and Baker Hughes used
Flowserve as a one of the companies in a peer group for the oil field service industry and established a multiple
of 11.8x 2018E EBITDA. We feel that if we were going to invest in Flowserve (if we had not disconfirmed it),
then we would like to see a multiple of 5x to 7x in order to consider that a margin of safety exists.
[paragraph(s) related to sections D, E and F removed]

14. Appendix Cover Page
Recent Price History

15. Appendix Executive Summary
Flowserve has consistently suggested they have “room to run” and they are “continuing to pursue strategic
growth opportunities” in conference presentations (several acquisitions have helped gain in market share).
Source: Baird Global Industrial Conference presentation November 10, 2016
Examples of Flowserve leadership expressing desire to increase market share:
"With our strong operational performance as a foundation, we believe the current environment provides
Flowserve significant opportunities to enhance its long-term strategic position. Even in our areas of strength, we
see solid prospects to accelerate our aftermarket and chemical positions, and believe market share growth is
achievable in emerging market power, upstream oil & gas and mining, to name a few. We will pursue these and
other growth strategies on both an organic and acquisitive approach, and we will continue to invest in R&D and
technologies. Additionally, with the completion of our 2015 SIHI acquisition, we expect to further improve that
business and drive growth through scale and operational efficiencies." Mark Blinn, Flowserve’s President and
CEO (2015)
"For example, we intend to expand our R&D and new product efforts, integrate and leverage the recent SIHI
acquisition, capture greater market share, and continue to pursue disciplined, profitable growth. As we build
Flowserve for the future, we will continue in 2015 to prioritize areas that are within our control, such as lean
initiatives and ongoing cost control, operational flexibility, strong project execution, further business
improvements and serving our customers. This dual focus of disciplined planning for the year and positioning
for durable growth should drive meaningful long-term value for our shareholders." Mark Blinn, Flowserve’s
President and CEO (2014)
“Our key to success will be to continue to pursue market share gains while maintaining a focus on operational
excellence and our pricing discipline" Lewis Kling, Flowserve’s President and CEO (while Blinn was CFO in 2009)

16. Appendix A
Some of the long-term tailwinds as communicated by Flowserve & Competition

17. Appendix B1-1
Flowserve’ FINRA data
Source: Valuation: Measuring and Managing the Value of Companies

18. Appendix B1-2
Flowserve’s Earnings Per Share 2006 - 2015
2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
EPS
$
2.00
$
3.76
$
3.41
$
2.84
$
2.55
$
2.29
$
2.53
$
2.58
$
1.49
$
0.67
EPS
Growth -46.8% 10.3% 20.1% 11.4% 11.4% -9.5% -1.9% 73.2% 122.4% N/A

19. Appendix C-1
Flowserve’s Competitive Landscape
Source: Hoovers
Source: Flowserve Analyst Day 2013 Presentation March 20, 2013

20. Appendix C-2
Economics and Cash Flows of Flowserve (2015 in $ millions)

21. [Appendices related to sections D, E and F removed]

22. Appendix Last Page – 1
Another Look at Flowserve’s Value
The Little Book of Value Investing by the late Christopher H. Browne (of Tweedy Browne, which was one of the
Superinvestor firms mentioned in Buffett’s paper) describes a method for valuing a business that is a variation of the
method described by Sharma in the Book of Value chapter “How to Value a Business”. Where Sharma’s method uses
current market prices of similar businesses to calculate capitalization ratios, Browne’s method uses data from recent
merger and acquisitions:
“Another method for uncovering opportunities that might belong in our inventory [of stocks to analyze] is to
look at the prices paid in corporate mergers and acquisitions [in the same industry] to find stocks that are selling
at a significant discount to what they are actually worth to a knowlegeable buyer. This discount will not escape
the eyes of a competitor or larger corporation that might have an interrest in enterring a particular industry by
taking over a company in that field. Most of the time, mergers or takeovers will occur at a price that is fairly
close to the real worth of the business. The swarms of investment bankers, accountants, and lawyers climbing
all over these deals with pencils and spreadsheets see to that.”
In the Baird Global Industrial Conference presentation given on November 10, 2016, Flowserve provided key figures for
four recent acquisitions (see below). They also stated that these acquisitions were made at “favorable multiples” and
included “auction process”. This usually means that a fair price was paid for the acquisition and more importantly gives
investors a view of how businesses in Flowserve’s industry are valued. In reading the presentation we find the key
capitalization ratio is Price/EBITDA.
Using EBITDA figures from Flowserve and Morningstar, we can compute “fair” values for Flowserve:
At close to $50 per share, Flowserve appears to be overvalued and refutes our initial thesis that Flowserve is
undervalued.
On Monday October 31, 2016 GE announced a deal to merge its oil and gas division with Baker Hughes. Barrons’s
reported the following pertinent details about the deal on November 7, 2016:
“Using a multiple of 11.8x 2018E EBITDA (based off a peer group [in the oil field service equipment segment] of
FMC Technologies (FTI), Dril-Quip (DRQ), National Oilwell Varco (NOV), Flowserve (FLS), Weir) to value its own
business, General Electric contends it is paying $76 per share to Baker Hughes shareholders after adding the
$13.7 billion NPV of synergies to the combined equity value, netting out General Electric’s 62.5% interest and
adding the cash dividend on a tax-free basis. 2/3 of General Electric’s revenues are derived from services versus
equipment and so a multiple of 9x-10x could be a better comp (in line with Halliburton (HAL) and a discount to
Acquisition Year Paid $m Price/EBITDA
SIHI 2014 373.00$ 10
Innomag 2013 78.80$ 11
Lawrence Pump 2011 88.20$ 8.6
Valbart 2010 199.40$ 8.1
Average 9.43
Date
EBITDA
$m
Diluted Shares
$m
EBITDA/SH
Estimate of Fair Value
(EBITDA/SH x 9.43)
Year end 2015 615 134 4.59 43.28$
TTM(Q3 2016) 416 131 3.18 29.95$

23. Schlumberger’s (SLB) 11x), especially given historical EBIT margins more in line with a service company than a
capital equipment provider.
Even if we use assume price/EBITDA of 11.8x and use 2015 EBITDA as a proxy for 2018E (optomistic view), we calculate a
share price for Flowserve of $50.49. With the current market price in the vicinity of this estimate, there is no margin
of safety.

24. References
Flowserve Corporation website
 Annual Report Shareholder Letters (2011 – 2015)
 News
o October 27, 2016 | Flowserve Corporation Reports Third Quarter 2016 Results
o September 22, 2016 | Flowserve Announces Executive Leadership Transition Plan
o April 27, 2015 | Flowserve Names Karyn F. Ovelmen Chief Financial Officer
o February 18, 2015 | Flowserve Announces Departure of Chief Financial Officer Michael Taff
o January 7, 2015 | Flowserve Completes the Acquisition of SIHI Group
 Presentations
o Baird Global Industrial Conference | November 10, 2016
o Flowserve Third Quarter 2016 Earnings Conference Call | October 28, 2016
o Gabelli 26th
Annual Pump, Valve and Water Systems Symposium | February 25, 2016
o Flowserve Fourth Quarter 2015 Earnings Conference Call | February 19, 2016
o SIHI Group Acquisition | November 14, 2014
o ANALYST DAY 2013 | March 20, 2013
Government & Regulatory websites
 Federal Reserve Bank of St. Louis (FRED): Corporate BBB bond data
 Financial Industry Regulatory Authority (FINRA): Flowserve bond data and prospectuses
 SEC/EDGAR: Company 10-K, 10-Q and DEF 14A statements for Flowserve and competitors
Sulzer website
 Annual Report Shareholder Letter (2015)
 Capital Market Day 2015 Zurich | February 12, 2015 One Company
Other Data Services and Websites
 Bloomberg Insights
 Fidelity Investments
 Fortune
 Seeking Alpha
 Yahoo! Finance
Data Services via UMASS Library:
 Hoover’s
 Morningstar
 Freedonia Focus Reports
o World Collection, World Industrial Valves, January 2016
o World Collection, World Pumps, January 2015

25. Books
Sharma, Anurag. Book of Value: The Fine Art of Investing Wisely. New York: Columbia University Press,
2016
Roberts, Gwilym. Chelsea to Cairo – ‘Taylor-Made’ Water through Eleven Reigns and in Six Continents: A
History of John Taylor & Sons and Their Predecessors. London: Thomas Telford Publishing, 2006
Dobbs, Richard; Manyika, James; Woetzel, Jonathan. No Ordinary Disruption: The Four Global Forces
Breaking All the Trends. New York: PublicAffairs, 2015
Koller, Tim; Goedhart, Marc; Wessels, David. Valuation: Measuring and Managing the Value of Companies.
Hoboken: Wiley, 2010, 5th University Edition
Articles
“Flowserve Acquires Ingersoll-Dresser Pumps”
http://www.chemicalonline.com/doc/flowserve-acquires-ingersoll-dresser-pumps-0001
“A brief history of pumps”
http://www.worldpumps.com/view/37296/a-brief-history-of-pumps/
“Baker Hughes: How Much is General Electric Really Paying?”
http://blogs.barrons.com/stockstowatchtoday/2016/11/07/baker-hughes-how-much-is-general-electric-really-paying/
Davidson Investment Advisors buys $13,254,895 stake in Flowserve Corp (FLS)
http://www.tradecalls.org/2016/11/davidson-investment-advisors-buys-13254895-stake-in-flowserve-corp-fls-3126110/
What Is FLS’s Management Saying about Its End Market Performance?
http://marketrealist.com/2016/08/flss-management-saying-end-market-performance/