Franklin
Electric Co. Inc. (FELE, $53.31): “Franklin Electric Running Dry After Pumping All
Time Highs”
By:
Solomon Dworsky, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Franklin Electric Co., Inc. (NASDAQ: FELE) is a manufacturer and
distributor of water and fuel pump systems. The Water Systems segment services industries including Residential, Agriculture and
Commercial Water Services. The Fuel Systems
segment manufacturers products including submersible pumps, sumps, vapor recovery systems and fuel management
systems. Franklin Electric Co., Inc. was
founded in 1944 and headquartered in Fort Wayne, IN.
•
Franklin Electric Co. generates revenue through three segments: Water Systems
(57%), Fueling Systems (22.2%) and Distribution
(20.8%).
• FELE shares reached a new all-time high of $55.63 during Q1 of 2019 following record earnings in FY
2018 and continued momentum in earnings during 2019.
• Franklin Electric Co., Inc. has experienced
price volatility in 2019 due to missing Q1 and Q2 earnings expectations.
• Water Systems has recently experienced
difficulty in continuing Sales and Operating Income growth from 2018 leading
management to lower 2019 EPS guidance from $2.47 to $2.37.
Key points:
Franklin
Electric Co., Inc. is
focused on providing their customers with Quality,
Availability, Service,
Innovation and Cost. Management has developed Availability by
expanding the distribution segment through strategic
acquisitions by
acquiring 4 major U.S. distributors and a foreign
distributor located in Argentina during 2017 and 2018. The result of these
acquisitions increased Operating Income of the Distribution segment by 70% from
Q3 2018. The Fuel Systems segment has gained brand recognition, as major
petroleum companies prefer Franklin Electric products over
competitor offerings. The Fuel Systems segment experienced a 2% organic growth in
sales, although currency translation marked down the slight growth to -1%. These
factors resulted in increased Free Cash Flows by 65% following capital expenditure
from Q3 2018.
Sales
in the Water Systems
segment missed management’s estimates for 3 consecutive
quarters in 2019 due to
unfavorable weather conditions, lowered government
spending on water
related projects and decreased foreign economic activity. Operating
Income for the Water
Systems segment was down 8% from the first nine months
of 2018 as well. Management anticipates conducting strategic acquisitions to increase sales. Along with strategic
acquisitions, the NOAA forecasted lowered
precipitation levels
within the United States during 2020 providing tailwinds
to Water Systems Sales.
What
has the stock done lately?
FELE
appreciated by 13.91%
over a 3-month period. FELE lowered 4.22% following 2019
Q3 earnings release,
despite beating market expectations. The decrease in value
can be attributed to decreased sales in the Water Systems segment missing management’s
estimates.
Past
Year Performance:
FELE’s
YTD performance has been
exceptional with a 24.32% increase in value. Strategic
acquisitions increased
the Distribution segment sales by 9.3% from 2018. The
Water Systems Segment
has decreased in organic sales growth by 1% from 2018.
The Fuel Systems segment
has top line sales growth at par with 2018 results
and experienced record operating income within the segment largely due
to sales in favorable product mixes.
Source:
FactSet
My
Takeaway
Franklin Electric
has produced record sales in FY 2018 and are indicating a slow down on top-line growth during 2019. Sales and operating income in
the Water Systems segment have decreased and
influenced management to lower 2019 Guidance on EPS by 10 cents. Water Systems segment has experienced
headwinds including unfavorable weather
conditions and poor sales mix. The Fuel Systems segment experienced a decrease in organic growth due to currency exchanges by
-1% and remain at par in operating income
growth from 2018. The Fuel Systems segment is gaining brand recognition and continued producing near record numbers
from 2018. FELE was added to the portfolio with
an expected value of $44.20 and has exceeded the valuation. Franklin Electric’s largest revenue segment, Water Systems,
has stagnated in growth during 2019 while
their other segments are continuing growth in
top and bottom lines. With these factors, it may be time to reap the upside of Franklin Electric unless the firm finds solutions
to spark organic or inorganic growth in Water
Systems segment.
Source:
FactSet
