Improved free cash flow visibility over the next six months, combined with an attractive and safe dividend yield suggest that price momentum may continue, driving the stock to new highs. We now expect some earnings growth even for 2008, but the main investment thesis for FTE is P/E multiple expansion, which is now dramatically taking place. We believe investors aggressively de-rated FTE's P/E multiple in 2005-2006 due to limited cash flow visibility, but we view those fears as overdone and expect the stock to make new highs going forward.
France Telecom is trading at 13.0x our revised 2008 earnings per ADR estimate, which is a discount to the average telecom operator. We believe the discount should narrow, given France Telecom's dominant position in the French telecom market (both fixed and wireless), and the potential for dividend increases although to a lesser extent now.
We expect the stock to get back to its positive momentum, largely due to the impact of cost cutting and rapidly improving results internationally and in France. We revise down our target to $40.00 to reflect rising market risk premiums.
Flowserve Corporation
Flowserve Corp. (
FLS) which manufactures fluid control devices, including valves, industrial pumps and seals, is trading at 52-week highs after it reported record first quarter results on Apr 28 which beat Wall Street estimates by 61.05%.
Flowserve Reports Record Quarter
The company, a Zacks #1 Rank (Strong Buy), reported record first quarter earnings that were up 159% compared with first-quarter 2007 earnings to $1.53 per share versus consensus estimates of 95 cents per share. Sales grew 24% to $993 million compared to the same quarter in 2007.
Quarterly bookings were also a record $1.43 billion, an increase of 31% over the year ago period. Flowserve said that all of its global core markets showed continued strength and that there was strong growth in both original equipment and aftermarket business.
'During the first quarter we achieved particularly strong record bookings and earnings, and we are also very pleased with our other record quarterly results,' said Lewis Kling, Flowserve President and CEO.
'The continued strength in our end-markets, both in the original equipment large project business and aftermarket business, provided outstanding opportunities which we capitalized upon during the quarter,' added Kling.
Flowserve Raises 2008 Guidance
After the strong results in the quarter and continued strength in key markets, the company raised guidance for the year to the range of $5.90 to $6.20 from $5.10 to $5.40 per share. Brokerage analysts' consensus estimates for the year now call for $6.23 per share.
Analysts are bullish on the company, estimating year-over-year earnings growth in 2008 of 50.02% and in 2009 of 16.67%. All five covering analysts have raised consensus estimates for the second quarter by an average of 12 cents to $1.43 from $1.31 a share.
Flowserve's forward P/E is 18.6. It has a solid five year average return on equity (ROE) of 10.42%. The company has surprised on estimates each of the last four quarters on average of 31.79%. As an added bonus, FLS also has a dividend yield of 0.80%.
