In an amended 13G filing earlier this week, Ralph Whitworth of Relational Investors disclosed his firm had lowered its stake in Flowserve Corporation (NYSE:FLS) to 2.34 million shares, a decrease of over 30% from its 2Q stake of 3.09 million shares. Whitworth founded the firm in 1996 with the idea of investing in strategic blocks.
At the end of 2Q, Flowserve was Whitworth’s fifth largest position and made up 6.5% of his firm’s 13F portfolio. Not to mention, Flowserve was an entirely new position for Whitworth—so why the sudden downsize? Perhaps because the company is up 80% year to date, and up 23% since Whitworth acquired its shares in June? Whitworth and Relational Investors made over $70 million on the Flowserve trade. Unfortunately, there were not many other funds that were alongside Whitworth—see all funds owning Flowserve. However, the next largest fund owner, Breeden Capital Management, owning over 650,000 shares, had over 16% of their 13F portfolio invested in Flowserve at the end of 2Q.
Another company that Whitworth appears to be bullish on is Illinois Tool Works Inc. (NYSE:ITW). Illinois overtook Pepsi as Relational Investors’ top holding during 2Q, with the firm nearly doubling its position to 14.6 million shares and 14% of its 13F portfolio. Revenue for Illinois Tool is expected to rise only 2% in 2012 and 4% in 2013. However, global industrial and manufacturing increases will expand operating margins from 15.5% in 2011 to 16.2% in 2012—this helps put estimated 2013 EPS to $4.60, from 2012’s $4.18. Yet the company trades in line with the industry on a P/E basis, has a number of recent insider sales, and saw two of its top fund owners, Steven Cohen and Diamond Hill Capital, downsize their positions. See our other thoughts on whether Illinois Tool is a good buy.
Although it is uncertain why Whitworth may be increasing his shares of Illinois Tool, his firm did retain over 2.34 million shares of Flowserve, leading us to believe that Whitworth sees further upside potential here. A few of Flowserve’s top competitors include Sauer-Danfoss Inc. (NYSE:SHS), Xylem Inc (NYSE:XYL) and IDEX Corporation (NYSE:IEX).
Xylem is flat on the year with concerns over weakness in Europe, with reliance on demand for public utility and industrial water infrastructure products. The outlook for Xylem remains mixed, with the demand for water infrastructure projects internationally remaining weak in the interim. Unless the company can expand with acquisitions its growth remains limited.
Sauer-Danfoss trades at a discount to its peers with a P/E of 10, versus the peer average of 17x, and the company also pays the highest dividend yield at 3.3%. Sauer-Danfoss’ 2Q earnings report showed an 8% decline in sales from the same quarter last year, as well as EPS down to $1.16 from $1.54. Drought conditions and economic uncertainty will continue to put pressure on the company’s key market of engineered hydraulics.
IDEX saw 2Q orders totaling $446 million, up 4% year over year and a completion of 626,000 shares of common stock for $25.9 million. Year to date the company has returned $118 million of capital to shareholders via repurchases, dividends and debt repayment. IDEX also announced the acquisition of Matcon Ltd. in July. This will help drive next quarter EPS up by 9% from the same quarter last year and put the 5-year EPS to a 15% CAGR. The company trades at a trailing P/E of 17—in line with its peers—but trades at a forward P/E of 14.
Flowserve plans to extend its product offerings and its global reach, which should help with the expected 7% growth in sales for 2012. Key global expansion plans include strengthening operations in the Middle East, Asia and Latin America, which are Flowserve’s three weakest geographical areas. The increased demand in these areas will be spurred by a boost in oil and gas activity. Products for oil and gas make up about 40% of Flowserve’s revenues.
Even with the run up in the stock’s price, Flowserve trades at a forward P/E of 12.5 and a trailing P/E of 16, putting the company’s PEG at 1.0. With Flowserve expected to grow 2013 earnings by over 20%, it appears the company is still a good buy.