TipRanks Smart Value #65: Hidden Flow
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Dear Investors,
Dear Investors,
Welcome to the 65th edition of the TipRanks Smart Value Newsletter.
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This Week’s Top Value Pick: Flowserve (FLS)
Flowserve (FLS) is a global industrial flow-control equipment and services company that designs and manufactures pumps, valves, seals, and related systems used across energy, chemical, water, and industrial markets. The company supports critical infrastructure and process operations through a large installed base, aftermarket service network, and engineered solutions platform, benefiting from long-term industrial investment, maintenance demand, and global energy and infrastructure spending trends.
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Flow Forward
Flowserve’s history reflects more than two centuries of industrial engineering evolution, with several of its legacy brands tracing their origins back to 1790. The modern company was formed in 1997 through the merger of BW/IP and Durco International, combining two major fluid motion and flow-control businesses into a single global platform focused on pumps, valves, seals, and industrial flow management systems. The merger significantly expanded Flowserve’s scale, product breadth, and global reach, positioning the company as one of the leading suppliers of mission-critical flow-control equipment used across energy, chemical, power generation, water, and industrial markets.
Following the merger, Flowserve pursued an expansion strategy centered on acquisitions, global manufacturing growth, and the development of a large installed equipment base. Over time, the company integrated several established industrial brands, including Worthington, Valtek, Limitorque, SIHI, Durco, Worcester, and Innomag, strengthening both its technological capabilities and customer relationships. These acquisitions expanded Flowserve’s presence in highly engineered applications where reliability, safety, and maintenance support are essential, helping the company secure long-term customer relationships and recurring aftermarket revenue streams.
A major contributor to Flowserve’s earnings growth has been its large global aftermarket services business. As the installed base of pumps, valves, and seals expanded, the company built a worldwide network of Quick Response Centers (QRCs) that provide repair, maintenance, diagnostics, retrofits, and replacement parts.
As part of broader portfolio optimization efforts, Flowserve completed the sale of its Gestra AG business unit to Spirax-Sarco Engineering in 2017. Management described the transaction as part of an effort to better align the company’s manufacturing footprint and concentrate resources around its core flow-control operations, improving competitiveness across key industrial markets.
In recent years, Flowserve has increasingly focused on operational improvement and higher-growth industrial opportunities through its “3D Strategy,” centered on diversification, decarbonization, and digitization. The company expanded its presence in nuclear power, LNG, hydrogen, carbon capture, water infrastructure, and energy-transition markets while investing in digital monitoring technologies such as its RedRaven Industrial Internet of Things (IoT) platform. Combined with restructuring initiatives, manufacturing optimization, pricing actions, and continued aftermarket expansion, these efforts strengthened the company’s earnings profile and improved cash generation.
Flowserve also accelerated its expansion into higher-value industrial applications through targeted acquisitions. In October 2024, the company acquired MOGAS Industries, a provider of service valves and related aftermarket services used in demanding industrial environments. The acquisition strengthened Flowserve’s position in mission-critical valve technologies while expanding its recurring aftermarket revenue opportunities. MOGAS was integrated into Flowserve’s Flow Control Division. Management highlighted the potential to expand the severe service portfolio – mission-critical valves and pumps engineered for extreme pressure, temperature, erosion, and corrosion conditions – globally using Flowserve’s manufacturing scale, distribution capabilities, and service network.
The company continued reshaping its portfolio in December 2025 by divesting BW/IP – New Mexico, the subsidiary holding all asbestos-related liabilities and associated insurance assets, to an affiliate of Acorn Investment Partners, a portfolio company of Oaktree Capital Management. Under the agreement, the buyer assumed responsibility for all current and future asbestos claims, while Flowserve contributed approximately $199 million in cash and related insurance assets to capitalize the entity at closing. The transaction simplified the company’s balance sheet, reduced long-term legal uncertainty, and freed additional capital to support future growth initiatives.
In February 2026, Flowserve announced a definitive agreement to acquire Trillium Flow Technologies’ Valves Division (TVD). TVD supplies highly engineered valves used in nuclear power generation, conventional power, industrial processing, and critical infrastructure markets. The acquisition will add an installed base of more than 200,000 valves, including equipment operating in 115 nuclear reactors worldwide, and is expected to expand Flowserve’s exposure to more than 300 supported nuclear reactors globally. Management expects the transaction to contribute roughly 300 basis points to 2026 sales growth following its anticipated mid-year closing. Beyond increasing scale in nuclear and critical infrastructure markets, the acquisition is expected to enhance recurring aftermarket revenue opportunities and strengthen Flowserve’s long-term growth profile.
These acquisitions, divestitures, operational initiatives, and aftermarket expansion efforts transformed Flowserve into a more diversified industrial flow-control platform with stronger recurring revenue streams, improved cash generation, and increased exposure to long-term global infrastructure, energy transition, and industrial investment trends.
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Enduring Moat
Flowserve’s products are used to move and regulate liquids and gases across a wide range of industries, including oil and gas plants, power stations, chemical facilities, water infrastructure systems, mining operations, and manufacturing sites. Because many of these operations run continuously and cannot afford equipment failures or downtime, customers often prioritize reliability, engineering expertise, and long-term service support when selecting suppliers.
The company operates through two primary business segments: the Flowserve Pump Division (FPD) and the Flow Control Division (FCD). FPD manufactures pumps, mechanical seals, and related systems used to transport liquids safely and efficiently across industrial facilities. FCD focuses on valves, automation systems, and specialized flow-control products designed for harsh operating conditions involving extreme temperatures, pressure, or corrosive materials. These businesses collectively allow Flowserve to serve a broad range of industrial infrastructure and energy markets around the world.
Flowserve serves a diverse set of industrial end markets through its pumps, valves, seals, automation systems, and aftermarket services. Its largest market is Energy, which includes oil and gas production, LNG facilities, pipelines, and refineries, where Flowserve equipment helps move, process, and control hydrocarbons and fuels. The company also serves General Industries, including manufacturing, mining, water infrastructure, food and beverage, and other industrial facilities that rely on fluid-handling systems for day-to-day operations.
In the Chemical market, Flowserve provides highly engineered flow-control solutions designed to safely handle corrosive and hazardous materials in chemical and petrochemical processing plants. Within the Power market, including nuclear and conventional power generation, the company supplies mission-critical equipment used in cooling, steam, and power-production systems.
Flowserve generates revenue through two main sources: original equipment sales and aftermarket services. Original equipment sales come from supplying pumps, valves, seals, and related systems for new industrial projects, including LNG facilities, power plants, chemical plants, and water infrastructure developments. These projects are often tied to large, long-term capital investment cycles.
An especially important part of Flowserve’s business is its aftermarket services operation, which provides maintenance, repairs, replacement parts, upgrades, and technical support for equipment already installed at customer facilities. Over decades, the company has built a large installed base of equipment and supports customers through a global network of Quick Response Centers (QRCs). Since industrial operators often cannot afford unexpected shutdowns, they regularly rely on Flowserve for ongoing servicing and replacement parts. This creates recurring revenue streams that are generally more stable and profitable than large new equipment orders.
Technology has also become a larger part of Flowserve’s strategy in recent years. The company has expanded its use of digital monitoring tools, automation, and AI-based analytics to help customers detect equipment issues earlier, improve reliability, and reduce costly downtime. These technologies also help customers improve energy efficiency and lower operating costs. Flowserve is increasingly applying these capabilities to newer markets such as liquid-cooled data center infrastructure, where its expertise in managing the flow and cooling of liquids can support the growing power and cooling needs of AI-focused data centers.
Looking ahead, several factors support the company’s long-term growth outlook. Flowserve continues expanding its presence in markets such as nuclear power, LNG, hydrogen, carbon capture, water infrastructure, and broader energy-transition projects. Acquisitions such as MOGAS Industries and the planned acquisition of Trillium Flow Technologies’ Valves Division are also expanding the company’s installed equipment base and creating additional long-term service opportunities.
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Infrastructure Revival
A major focus during the quarter was the disruption in the Middle East, which created an estimated $50 million headwind to bookings and roughly a 200-basis-point, or approximately $25 million, impact on first-quarter revenue due to logistics disruptions, project delays, and limited customer-site access. Flowserve employs approximately 800 associates in the region, and management noted that operations were forced to pause at times to ensure employee safety.
Despite the short-term pressure, management emphasized that most projects are being delayed, not canceled. This is important because many of Flowserve’s end markets, including LNG facilities, refineries, pipelines, nuclear projects, and water infrastructure, operate on multi-year investment cycles where project timing can shift without affecting long-term demand.
Management also highlighted Flowserve’s exceptionally large installed equipment base in the Middle East, including more pumps installed across the region than any competitor, along with a substantial installed base of valves and flow-control systems operating across energy and industrial infrastructure. This creates potential opportunities for future repair work, equipment replacement, servicing, and reconstruction projects once conditions stabilize further.
While the hostilities remain a near-term operational challenge, management maintained a constructive longer-term outlook for the region. The company believes reconstruction activity, infrastructure spending, and broader energy-security-related investments could eventually support stronger bookings growth over time. Management also noted that ceasefire conditions have already improved accessibility and project activity in certain areas.
Aftermarket bookings1 remained resilient and continued to perform at historically strong levels. Management also highlighted that project activity improved during March and April after a softer start to the year, while the company’s project pipeline increased both sequentially and year-over-year across energy, infrastructure, and industrial markets. Flowserve expects the second half of 2026 to carry a larger portion of annual growth as delayed projects begin moving forward and backlog conversion improves.
The weaker first-quarter revenue performance was also influenced by backlog composition. A larger share of backlog is currently tied to nuclear projects, which tend to convert into revenue more slowly because of lengthy engineering timelines, regulatory approvals, and construction schedules. Management noted that the current nuclear-heavy backlog converted into shippable revenue at roughly 76%, slightly below the company’s historical conversion range that typically falls in the mid-80% area. While this delayed near-term revenue recognition, management views nuclear as one of Flowserve’s most important long-term growth opportunities.
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1- Aftermarket bookings refer to orders the company receives for servicing, repairing, maintaining, upgrading, or replacing parts on equipment that has already been installed at customer facilities.
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Profit Pipeline
The company outlined three major nuclear growth drivers. The first involves upgrades, life extensions, and maintenance work for existing reactors, which management described as generating roughly $100 million in quarterly activity supported by Flowserve’s large installed equipment base. The second involves new large-scale reactor construction, particularly in Europe, where potential project awards could emerge during 2026, and increasingly in the United States as governments and utilities prioritize energy security and grid reliability. The third opportunity involves small modular reactors (SMRs), although management indicated meaningful commercial activity is likely at least two years away.
Another key takeaway for investors was the company’s strong margin performance despite lower sales volumes. Management stated that these gains were largely driven by the ongoing implementation of the company’s “80/20” operational strategy and broader Flowserve Business System initiatives. These programs focus on reducing exposure to lower-margin business, improving manufacturing efficiency, simplifying operations, and optimizing the company’s facility footprint. The Flow Control Division (FCD) remains earlier in this restructuring process, which created some temporary revenue pressure during the first half of the year as the company intentionally exited less profitable business. However, management noted that Flow Control bookings improved sequentially during the quarter, supporting expectations for stronger volume recovery later in the year. The company also reaffirmed its target of approximately 100 basis points of operating margin expansion for FY26, excluding temporary tariff refunds and one-time tax-related items.
Flowserve’s large aftermarket business also continues to support earnings stability. Even in refining markets where some planned maintenance shutdowns are being delayed because of strong refinery profitability and elevated utilization rates, management noted that increased emergency repair work and unplanned maintenance activity are helping offset the impact. Since industrial operators cannot afford extended equipment failures, Flowserve continues benefiting from recurring demand for repairs, servicing, replacement parts, and maintenance support.
Another emerging theme was the growing customer interest in new infrastructure investments tied to energy security. Management noted that industrial customers, refiners, utilities, and energy companies are increasingly discussing potential capacity expansions and new projects that were not originally included in Flowserve’s 2026 planning assumptions. While still early-stage, these discussions could create additional long-term opportunities across LNG infrastructure, pipelines, nuclear power, refining, and industrial processing markets.
Activist investor Starboard Value recently urged Flowserve to accelerate its performance improvement efforts, arguing that the company is benefiting from powerful long-term tailwinds in reindustrialization, power generation, nuclear energy, and energy security but has still underperformed due to execution issues. Starboard said Flowserve’s recently announced 2030 targets, including mid-single-digit organic sales growth, a 20% adjusted operating margin, and double-digit adjusted EPS growth, should be viewed as only a starting point, contending that management needs to deliver stronger results more quickly.
In response, Flowserve said it has been actively engaging with Starboard and remains committed to creating long-term shareholder value. The company highlighted that it has improved adjusted operating margins by 860 basis points since 2022 and reaffirmed its 2026 outlook for adjusted margin expansion and double-digit adjusted EPS growth. Flowserve also pointed to strong cash generation, including $365 million returned to shareholders in 2025, of which $255 million came through share repurchases, while emphasizing growth opportunities tied to aftermarket services, nuclear power, AI-driven data center demand, and energy-security investments.
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Execution Edge
Over the past three years, FLS’s revenues and EPS have grown at a CAGR of 7.2% and 15.8%, respectively, driven primarily by strong expansion in its higher-margin aftermarket business, rising demand from nuclear and power markets, and sustained operational improvement initiatives. The company benefited from growing nuclear bookings, recurring servicing revenue tied to its large installed equipment base, and continued margin expansion through its Flowserve Business System and “80/20” operational strategy. At the same time, Flowserve significantly improved profitability and cash generation, supported by higher-margin aftermarket activity, manufacturing efficiency gains, and stronger operating leverage.
The company reported first-quarter sales of $1.07 billion, a decline of 6.7% year-over-year and below consensus estimates. Flowserve’s bookings totaled approximately $1.15 billion, down 6% year-over-year, while the company generated a book-to-bill ratio2 of 1.07x. Despite the softer top-line performance, aftermarket demand remained resilient. Aftermarket bookings reached $680 million, marking the eighth consecutive quarter above the $600 million level, although results declined modestly from a particularly strong prior-year comparison that benefited from large nuclear-related activity.
Bookings remained diversified across energy infrastructure and refining (34%), general industrial and manufacturing markets (30%), chemical processing (19%), and power generation, including nuclear (17%). Energy and general industrial markets continue to be the company’s primary near-term growth drivers, together accounting for nearly 66% of total bookings and benefiting from strong aftermarket demand, manufacturing investment, supply-chain regionalization, and infrastructure spending trends.
Chemical processing remained the weakest end market, particularly in Europe, where management acknowledged that structural softness continues to pressure demand despite expectations for gradual improvement over time. Within power markets, bookings declined 12% year-over-year and represented 17% of the quarterly total. Nevertheless, management continues to view nuclear power as one of Flowserve’s most attractive long-term growth opportunities. During the quarter, the company secured more than $110 million in nuclear awards, including two projects valued at more than $20 million each, further expanding its exposure to nuclear infrastructure investment.
Original equipment bookings were pressured by weaker maintenance and repair activity in North America early in the quarter, along with the Middle East disruption. Management emphasized that, excluding the estimated regional impact, bookings were broadly in line with internal expectations.
Profitability remained one of the strongest aspects of the quarter. Adjusted gross margin expanded 370 basis points year-over-year to 37.2%, marking the company’s 13th consecutive quarter of margin expansion. Adjusted operating margin increased 230 basis points to 15.1%, despite lower sales volumes, reflecting continued operational improvements and pricing discipline. The company reported adjusted EPS of $0.85, up by 18.1% year-over-year, exceeding Street expectations.
Within the company’s segments, the Flowserve Pump Division generated adjusted gross margins of 37.7% and operating margins of 19.1%, while the Flow Control Division delivered adjusted gross margins of 35.2% and operating margins of 15.9%. Although Flow Control revenue declined 10%, management noted that part of the weakness reflected deliberate “80/20” portfolio actions.
The company’s profitability metrics also remain strong relative to industry peers, with ROE, ROIC, and ROA ranking among the top 25% to 30% of companies within the Industrials sector.
Cash flow followed normal seasonal patterns during the quarter. Operating cash flow was negative $43 million, which management noted is typical because the first quarter is generally the weakest period of the year due to working capital requirements. At the same time, balance sheet conditions continued improving, with net leverage declining to approximately 1.2x.
Flowserve also strengthened its financial flexibility during the quarter. In April, the company amended its credit facility, extending maturities by five years while increasing revolving credit capacity. More recently, it priced a $500 million public offering of 5.7% senior unsecured notes due 2036. The proceeds are expected to primarily fund the planned acquisition of Trillium Flow Technologies’ Valves Division, with any remaining funds available for general corporate purposes, including debt repayment. If the acquisition is not completed by the agreed deadline or the purchase agreement is terminated, Flowserve intends to redeem the notes at 101% of principal plus accrued interest using offering proceeds, cash on hand, or borrowings.
Looking ahead, Flowserve lowered its FY26 revenue growth outlook to a range of 3% to 6%, compared with prior guidance of 5% to 7%, with organic revenue now expected to range between -1% to +2%. Despite the lower sales outlook, management reaffirmed adjusted EPS guidance of approximately $4.10 at the midpoint, representing roughly 13% year-over-year growth. The company also reaffirmed its target of generating free cash flow equal to at least 90% of adjusted net earnings.
Guidance assumes the planned acquisition of Trillium Flow Technologies’ Valves Division closes around mid-year and contributes roughly 300 basis points to annual sales growth. Management expects second-quarter sales to decline by a low-to-mid single-digit percentage year-over-year, with earnings remaining broadly consistent with first-quarter levels. However, the company anticipates stronger performance during the second half of the year as large project activity improves, nuclear awards begin converting into revenue, temporary portfolio simplification headwinds subside, and potential Middle East reconstruction activity starts to emerge.
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2- A “book-to-bill ratio” is a measure that compares how many new orders a company receives versus how much revenue it recognizes during a given period. A ratio above 1.0x generally means the company is receiving more new orders than it is shipping or recognizing as revenue, which typically indicates growing future demand and backlog.
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Rising Currents
Over the past year, Flowserve’s stock price has surged by more than 50%, as investors have responded to the company’s improving fundamentals and growing exposure to several attractive end markets. Strong profitability improvements, resilient aftermarket demand, and increasing participation in nuclear power, energy infrastructure, and AI-driven data center investments have all contributed to the stock’s strong performance. Investor sentiment has also been supported by strategic actions, including the divestiture of legacy asbestos liabilities, the acquisition of Trillium Flow Technologies’ Valves Division, and activist involvement from Starboard Value, which has pushed management to accelerate operational improvements.
Despite the strong share-price appreciation, Flowserve’s valuation remains relatively reasonable. The stock is trading at a slight discount to its historical averages based on non-GAAP trailing and forward P/E ratios, while its forward EV/EBITDA multiple remains broadly in line with historical averages. This indicates that investors are pricing in continued earnings growth and margin improvement but remain somewhat cautious about the pace at which management can execute its long-term strategy.
Relative to peers such as IDEX Corp., Pentair, Crane Company, and ITT, Flowserve trades in the low-to-moderate valuation range based on non-GAAP trailing and forward P/E ratios, forward EV/EBITDA, and forward price-to-cash-flow multiples. This suggests that the market has not fully priced in the potential benefits of the company’s margin expansion initiatives, growing nuclear and power exposure, expanding aftermarket business, and recent strategic acquisitions. As Flowserve continues to deliver on its profitability targets and growth objectives, investors could see room for both earnings growth and a potential valuation re-rating over time.
Analysts remain bullish about FLS, citing the company’s significant profitability gains and improving returns. Margin expansion has been supported by operational initiatives such as the Flowserve Business System and product portfolio rationalization, while the company’s large installed equipment base continues to generate recurring, higher-margin aftermarket revenue. This recurring business provides stable cash flow, supports earnings resilience, and reduces exposure to cyclical swings in new equipment demand. At the same time, expanded credit facilities have strengthened Flowserve’s liquidity and financial flexibility, providing additional capacity to fund acquisitions, support working-capital needs, and pursue future growth opportunities.
Reflecting these factors, Wall Street’s consensus price target implies approximately 21% upside from current levels, while more bullish estimates suggest potential upside of roughly 36%. Discounted cash flow analysis also indicates that Flowserve’s shares may be trading at an estimated 37% discount to intrinsic value, suggesting that the market may not yet be fully reflecting the company’s long-term earnings potential.
Flowserve has maintained a consistent dividend since becoming a public company in 1997 and has periodically increased its payout over time. The company currently distributes approximately 23% of adjusted earnings through dividends, leaving substantial room to reinvest in growth initiatives, acquisitions, operational improvements, and balance sheet management while continuing to return cash to shareholders. For the most recent quarter, Flowserve declared a dividend of $0.22 per share.
Share repurchases represent the second component of the company’s capital return strategy. Over time, Flowserve has authorized roughly $1 billion of cumulative share buybacks, using repurchases opportunistically to supplement dividend payments and enhance per-share earnings growth. Although the company did not repurchase shares during the first quarter of 2026, management has continued to emphasize shareholder returns as part of its broader capital allocation framework. As of March 31, 2026, approximately $197.9 million remained available under existing repurchase authorizations.
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Investing Takeaway
Flowserve appears to offer an attractive combination of improving business quality and a valuation that does not fully reflect its long-term potential. The company has transformed itself into a more resilient industrial platform through operational improvements, portfolio optimization, and the expansion of its higher-margin aftermarket business. At the same time, it is increasing its exposure to several durable growth markets, including nuclear power, energy infrastructure, water systems, and AI-related data center cooling. Its large installed equipment base generates recurring service revenue that supports cash flow and reduces reliance on new project cycles. While investors have recognized some of these improvements, the stock continues to trade at a reasonable valuation relative to both its history and industry peers. For value-oriented investors seeking a high-quality industrial business with improving profitability, recurring revenue, and multiple long-term growth drivers, Flowserve remains an appealing opportunity.
