Credit Suisse Upgrades Flowserve, Sees Sustained EPS Growth Through 2022

The case for turning bullish on Flowserve Corp FLS can be made after the flow control products and services company reported encouraging second-quarters results, according to Credit Suisse.

The Analyst

Credit Suisse's John Walsh upgraded Flowserve from Neutral to Outperform with a $54 price target.

The Thesis

Flowserve reported an earnings beat while organic sales rose 6% from last year and operating profit margins expanded by 200 basis points, Walsh wrote in a note. The momentum seen across LNG, midstream and petrochemical segments should help sustain a mid-teens earnings growth rate through 2022.

The company discussed two projects it won in the second quarter, which Walsh said suggests management's "FLS2.0" initiatives are working. One of the contract wins is with a large LNG player that includes FLS pumps, valves, seals and services. The second big contract is with a midstream pipeline company and incorporates a new focus area.

Walsh said management also deserves credit for its strong free cash flow which improved from negative $88 million in the first half of 2018 to positive $24 million in the first half of 2019. The reversal in free cash flow to positive territory occurred despite "quarterly lumpiness" and could improve even more as the company streamlines trade working capital.

Flowserve should benefit from a the positive energy cycle, which supports pricing benefits. In fact, the company has been increasing its price over the past few quarters and it's "encouraging" to see its peers follow suit with similar pricing actions.

Price Action

Shares of Flowserve traded slightly lower Friday afternoon at $45.30.

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