We wrote about Flowserve Corporation (NYSE:FLS) in September of last year when we said the company’s dividend would eventually attract investors here. Shares remain down just under 4% since we wrote this article, however, so we haven’t seen the upside we originally expected. To better understand why this is the case, we can first consult the technical tables. As we see on the long-term chart below, Flowserve shares actually remain stuck in a bear market. Stocks need to eliminate this heavy overhead resistance in order to finally end the pattern of lower highs. Equities however remain heavily oversold and we have a monthly low in place. This swing low may indeed provide the impetus for stocks to at least once again test this multi-year aerial resistance.
The stock price action on the daily chart is also encouraging as stocks are currently trying to break above the multi-month resistance. Additionally, the money flow and volume trends have turned bullish, leading us to believe that this attempt will eventually pay off. Reading the charts is important because it takes into account all the fundamentals of Flowserve. There are many moving parts currently affecting Flowserve (supply chain bottlenecks, inflation, labor shortages, etc.), which means the market is continuously pricing these challenges into the course of the action while simultaneously monitoring business growth and anticipated bookings in the future.
For example, there is no doubt that the company would have seen higher sales and profits in the recent third quarter, but for the issues mentioned above, it didn’t work out. Core sales fell nearly $60 million to $866.1 million and net profit was down about $6.3 million from the same quarter 12 months prior. Looking at these numbers on the surface isn’t encouraging, but there’s more to see here under the hood so to speak. For example, the $60 million drop in sales in the third quarter would not have happened without the supply chain and labor issues the company experienced during the quarter. Now some may say this is normal in the industrial space and that Flowserve will continue to be affected by external factors due to the configuration of its logistics operations.
While that may be true (which may mean more pain in the short term), internal trends point to continued growth ahead here. We say this because year-over-year bookings were up more than 13% ($912 million) in the third quarter, which means the backlog for the last three quarters was up $115 million. dollars. Suffice it to say, the secure backlog and demand Flowserve is witnessing in multiple end markets will eventually be reflected in the company’s numbers. It is therefore a question here of remaining in the game long enough to be able to carry out this work.
Management has already been proactive in this regard by entering into a new credit facility in September. By changing its credit with the addition of $300 million, Flowserve has gained liquidity and flexibility as the company weathers these extraordinary times. The refinancing brought the company’s cash balance to $1.5 billion at the end of the third quarter. Suffice it to say, given the decline in on-balance sheet leverage and the decline in receivables to $946 million at the end of the third quarter, these are encouraging trends regarding the sustained generation of Treasury.
More than half of Flowserve’s equity is in receivables, so generating and protecting cash flow remains the top priority in the near term. Cash flow from operations was nearly $90 million in the third quarter, meaning the $150 million in cash flow from operations generated to date was up about 32% from the previous quarter. ‘last year. As long as these trends continue, the company is essentially positioning itself to achieve the expected earnings growth in the future.
Suffice it to say that with stocks trading at a book multiple of 2.4 and a sales multiple of 1.18, projected growth over the next several quarters should bring those multiples back towards the numbers we have been expecting. accustomed over the last 5 years (5-year averages of P/B of 3.19 and P/S of 1.42). Going forward, it all depends on Flowserve’s reserved project schedule. Can the company execute or will supply chain difficulties continue to put the brakes on work when it comes to customers not being served quickly? Can the company overcome its labor difficulties in a timely manner? Shareholders hope that these problems will be transitory. We will know the extent of these challenges in the coming quarters.
Therefore, to sum up, we think the bullish techniques we are currently seeing in Flowserve have a lot of merit. Bookings are increasing and liquidity has been bolstered to ensure the business is prepared for more near-term uncertainty. It takes patience but ultimately the next stop for stocks is this overhead resistance on the long-term chart. We look forward to continued coverage.