Flowserve (FLS)

Flow control equipment manufacturer Flowserve (NYSE:FLS) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 5.2% year on year to $1.14 billion. Its non-GAAP profit of $0.72 per share was 19.6% above analysts’ consensus estimates.

Company Overview

Manufacturing the largest pump ever built for nuclear power generation, Flowserve (NYSE:FLS) manufactures and sells flow control equipment for various industries.

Gas and liquid handling companies possess the technical know-how and specialized equipment to handle valuable (and sometimes dangerous) substances. Lately, water conservation and carbon capture–which requires hydrogen and other gasses as well as specialized infrastructure–have been trending up, creating new demand for products such as filters, pumps, and valves. On the other hand, gas and liquid handling companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.

Competitors offering similar products include Emerson Electric (NYSE:EMR), ITT (NYSE:ITT), and Grundfos (private).

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Flowserve grew its sales at a sluggish 3.2% compounded annual growth rate. This fell short of our benchmark for the industrials sector and is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Flowserve’s annualized revenue growth of 10.6% over the last two years is above its five-year trend, suggesting its demand recently accelerated.

We can better understand the company’s revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Flowserve’s backlog reached $2.9 billion in the latest quarter and averaged 3.6% year-on-year growth over the last two years. Because this number is lower than its revenue growth, we can see the company fulfilled orders at a faster rate than it added new orders to the backlog. This implies Flowserve was operating efficiently but raises questions about the health of its sales pipeline.

This quarter, Flowserve reported year-on-year revenue growth of 5.2%, and its $1.14 billion of revenue exceeded Wall Street’s estimates by 3.6%.

Looking ahead, sell-side analysts expect revenue to grow 4.7% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and suggests its products and services will face some demand challenges.

Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.

Flowserve’s unit economics are better than the typical industrials business, signaling its products are somewhat differentiated through quality or brand. As you can see below, it averaged a decent 30.5% gross margin over the last five years. Said differently, Flowserve paid its suppliers $69.52 for every $100 in revenue.

Flowserve’s gross profit margin came in at 32.3% this quarter, in line with the same quarter last year. On a wider time horizon, Flowserve’s full-year margin has been trending up over the past 12 months, increasing by 1.9 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Flowserve has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 8.1%, higher than the broader industrials sector.

Looking at the trend in its profitability, Flowserve’s operating margin rose by 2.8 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Flowserve generated an operating profit margin of 11.5%, up 1.1 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Flowserve’s EPS grew at an unimpressive 7.4% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 3.2% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Flowserve’s earnings to better understand the drivers of its performance. As we mentioned earlier, Flowserve’s operating margin expanded by 2.8 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Flowserve, its two-year annual EPS growth of 39.4% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.

In Q1, Flowserve reported EPS at $0.72, up from $0.58 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Flowserve’s full-year EPS of $2.77 to grow 16.5%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Flowserve has shown weak cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.3%, subpar for an industrials business.

Taking a step back, we can see that Flowserve’s margin dropped by 1.4 percentage points during that time. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business.

Flowserve burned through $49.93 million of cash in Q1, equivalent to a negative 4.4% margin. The company’s cash flow turned negative after being positive in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Flowserve’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 10.4%, slightly better than typical industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Flowserve’s ROIC increased by 4.4 percentage points annually over the last few years. This is a good sign, and if its returns keep rising, there’s a chance it could evolve into an investable business.

Flowserve reported $540.8 million of cash and $1.53 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $655.1 million of EBITDA over the last 12 months, we view Flowserve’s 1.5× net-debt-to-EBITDA ratio as safe. We also see its $67.21 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Flowserve blew past analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Zooming out, we think this was a solid quarter. The stock traded up 7.4% to $48.19 immediately following the results.

Updated: May 22, 2025 at 11:03 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Flowserve, you should also grasp the company’s longer-term business quality and valuation.

Flowserve has a few positive attributes, but it doesn’t top our wishlist. Although its revenue growth was weak over the last five years, its growth over the next 12 months is expected to be higher. And while Flowserve’s backlog growth has disappointed, its projected EPS for the next year implies the company’s fundamentals will improve.

Flowserve’s P/E ratio based on the next 12 months is 15.3x. This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $62.50 on the company (compared to the current share price of $49.38).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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