Fiduciary Management Inc., an investment management firm, published its “Small Cap Equity” first quarter 2021 investor letter – a copy of which can be downloaded here. A return of 12.6% was reported by the FMI Small Cap portfolios for the Q1 of 2021, compared to 12.70% for the Russell 2000 Index and 21.17% for the Russell 2000 Value Index over the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Fiduciary Management, in their Q1 2021 investor letter, mentioned Flowserve Corporation (NYSE: FLS) and shared their insights on the company. Flowserve Corporation is an Irving, Texas-based machinery industry company that currently has a $5.1 billion market capitalization. Since the beginning of the year, FLS delivered a 7.71% return, extending its 12-month gains to 71.82%. As of April 15, 2021, the stock closed at $39.69 per share.
Here is what Fiduciary Management has to say about Flowserve Corporation in their Q1 2021 investor letter:
“Flowserve is a leading manufacturer and aftermarket service provider of flow control systems, with sales of $3.7 billion. The company has two divisions: Flowserve Pump Division (pumps), with 72% of sales, and Flowserve Control Division (valves), with 28% of sales. Flowserve serves more than 10,000 customers in over 50 countries. End markets served include Oil & Gas (35%), Chemical (29%), General Industries (18%), Power (14%), and Water (4%). North America accounts for 37% of sales, followed by Asia Pacific (23%), Europe (22%), Middle East & Africa (12%), and Latin America (6%). The company’s market cap is $5.2 billion.
Good Business
• Flowserve has respected brands and technical expertise across broad industry process applications, and a history of strong customer relationships with end users, engineering and construction companies, and distributors.
• A significant installed base with more than five million assets provides recurring aftermarket opportunities. The aftermarket accounts for one-half of sales. The products and services are used in mission-critical applications.
• As restructuring expenses have declined, operating margins have improved. Flowserve has become less working capital-intensive as it has grown.
• Net debt is at the lowest level since 2012. The leverage ratio is a relatively modest 1.35 times. Free cash flow (FCF) is abundant.Valuation
• Flowserve trades for around 20 times depressed 2021 estimates and 10 times prior peak earnings. After the company completes a multi-year restructuring process, it is expected to be a better business than historically, and therefore, should garner a higher multiple.
• The company is being valued at a low-teens enterprise value-to-EBITDA multiples on 2021 and 2022 estimates.
• Flowserve converts approximately 100% of its net income into FCF. There should be ample room for share repurchases and dividends in the future.Management
• Scott Rowe has been President and CEO since April 2017. Although the turnaround may take a little more time to complete, we have been impressed by his progress to date.
• There has been a much-needed wholesale upgrade of leadership directly reporting to Mr. Rowe, and multiple changeouts from the board.
• A large number of senior leaders now have FCF and working capital metrics as part of their incentive compensation benchmarks, which will be measured quarterly, rather than simply a year-end target.Investment Thesis
Flowserve is in a far better place than it was just four years ago, aided by the implementation of self-help initiatives under new management which has taken, or is taking action to optimize its manufacturing footprint, improve (standardize) processes, invest in systems, reinvigorate innovation, and improve the capture rate of its large installed base. The company’s long-term targets include revenue growth of 2% above the industry growth rate and achieving an operating margin of mid-teens, up from 10% in 2020. Flowserve is a higher-quality way to gain exposure to the out-of-favor energy space.”
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Our calculations show that Flowserve Corporation (NYSE: FLS) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Flowserve Corporation was in 21 hedge fund portfolios, compared to 19 funds in the third quarter. FLS delivered a 2.93% return in the past 3 months.
The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
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Disclosure: None. This article is originally published at Insider Monkey.
