I was convinced to highlight Tom Bishop’s latest recommendation today after I Googled the company — and watched a high-pressure stream of water cut a cake into six pieces, and then cut an intricate design into piece of steel. Read the recommendation, below, and then, if you’re intrigued, Google “Can water cut it?” for some goofy but impressive demonstrations of the technology.
“Today, increasingly profitable Flow International Corp. (FLOW) is the world leader in the development and manufacture of ultra-high-pressure waterjet technology that can cut virtually anything from titanium to toilet paper. It is also a leading provider of software and robotics equipment used with these waterjets.
“However, ten years ago Flow International was a very different company. Its waterjets were much less powerful and had some lag issues, and its focus was a bit all over the place. ... In fact it was hemorrhaging money to the point that it brought in a turnaround specialist who spent the next five years streamlining and refocusing the company on an improved waterjet line-up. ... So about five years ago, mission accomplished, the turnaround guy moved on and they brought in an operations guy, Charlie Brown, to move the company forward. Well he jumped right in, took the wheel of this shiny new streamlined company and before he could even get up to full speed — ran right into the great recession. Argh. So business naturally dropped off.
“The company circled the wagons and cut costs, but continued to improve its product line. Long story short, the company crossed back into profitability in its fiscal Q4 ending April 2010 with a greatly improved and enhanced product line of higher-pressure waterjet products, and hasn’t looked back since. Sales have advanced steadily in every quarter for at least the past 11, save one little hiccup, and Flow has never been more excited about its future.
“So, let me get you excited about high-pressure waterjets. Like I said they can cut almost anything — well — okay, not diamonds, but that’s about all that comes to mind. These things can cut titanium, composites and thick pieces of aluminum and steel, stone, hardened ceramics and tile. But some of the more fascinating applications are on the softer side. For over 30 years Flow systems have been used by the paper industry, with 700 installations world-wide, for edge trimming and slitting tissue(!), as well as coated paper and composites. Flow waterjets are used by the food industry to cut meats, poultry, fish, produce, pastries, frozen foods, candy bars and even Fig Newtons! (You can’t make this stuff up.) Really, I’m serious. Think about it. If you use a saw or metal cutting edge, on occasion you can leave a metal fragment in the item, and that never ends well. If you use a laser you’ll melt or cook whatever you are cutting. So Flow’s waterjets have an edge. ...
“In the automotive industry Flow waterjet systems are used to cut carpets, door panels and bumpers. And the recent strength of the auto industry is a plus here. Flow even makes a line of waterjets (essentially super powerful power washers) to strip the paint off ships in preparation for repainting. The old method of using chemicals that stripped off the paint required remediation afterwards. Waterjets are more environmentally friendly.
“One application that really turns my crank is the use of these waterjets by the world’s leading aircraft manufacturers — like Boeing, Airbus and numerous other overseas manufacturers. In an effort to make new aircraft more economical to operate, with improved fuel economy, they are making them lighter — and using composite materials made out of fiber to do so. These don’t cut well with a saw, because of the fiber. Lasers melt them, and it turns out waterjets are a great way to go. Meanwhile, they can also cut aluminum and titanium, so aircraft manufacturers love the diversity of these systems.
“Believe it or not (you might not know it from the baggage fees and other desperate-seeming pricing measures being used by airlines), there is a boom going on in the industry to buy new aircraft, led by the 787 Dreamliner, and to replace old ones, across all aircraft, airlines and geographies. Old aircraft are being replaced, emerging nations want aircraft for their swelling middle classes and everybody wants more fuel-efficient aircraft.
“It is expected that 6,500 new Dreamliners and other aircraft will be delivered over the next five years. Boeing alone has a backlog of 3,700 aircraft, which increased 10% in the past quarter alone. Some of the waterjet systems Flow provides to the likes of Boeing are multi-million dollar customized systems with robotic controls that take several years to complete — such that they require percentage-of-completion accounting. Clearly there is no doubt that there is a growing place for these waterjets in manufacturing, and in fact the technology is the fastest-growing major machine tool process in the world, due to its versatility and ease of operation (per Frost & Sullivan). So, there.
“Flow offers a full range of waterjet products as well as the software and robotics that go with these, plus a healthy chunk (about 30%) of revenue comes from spare and replacement parts, and this carries the highest gross margin, in the upper 40%s. There is even a razorblade feature of sorts here, in that the abrasives used in the water wear out the nozzles.
“The company has a waterjet system for every price point. Most standard systems cost between $100,000 and $400,000, but the company also makes more customized ‘Advanced Systems’ that can cost into the millions of dollars (as noted, many of these go to the aircraft industry).
“A good bit of past revenue has come from its Standard Mach 3 system, which operates up to 60,000 pounds per square inch (PSI). But the company also makes the lower-cost, economy Mach 2 with pressures up to 55,000 PSI. And at the other end of the spectrum is the Mach 4 system, with pressures up to 94,000 PSI, multi-axis 3-D and beveling capability, said to be years ahead. Sales of the Mach 2 and Mach 4 are ramping up now and did not contribute meaningfully to Q3 results, so these are growth drivers for the future.
“The company sells its products globally through a direct sales channel of 70 Flow reps that has taken 25 years to build. In addition, it utilizes an indirect sales channel of over 70 distributors and agents, which is ultimately expected to generate one-third of revenues.
“Having been laden with debt 10 years ago, Flow now has zero debt and $10 million in cash. The company reported $0.07 a share for fiscal Q3 (ended January), $0.02 above the consensus and far surpassing the prior year’s $0.03. Gross margin was about 40%. Revenues increased 15% to a record $65.6 million. Flow expects a fiscal Q4 pretty much like Q3, which leads to a full year estimate of $0.20 (quadruple last year’s $0.05) and revenues of $255 million, up 18%.
“Flow’s two analysts both have a Buy on the stock, an average target of $5.50 and both see 40% growth in EPS to $0.28 on $272 million of revenue for 2012. That’s a forward P/E of just 13.6 vs. a longer-term growth rate of 20% to 25%, yielding an attractive P/E/G of 0.6. Zacks ranks the shares 1, IBD gives it a strong 95 composite rating, the BI Rank is 10.4. (And I own some of this one.) Accordingly, FLOW is a buy to $4.30, but use limit orders.”
- Tom Bishop, BI Research, March 14, 2012