Wednesday, December 4, 2019

A Current AIM Small Cap Equity Holding: Franklin Electric Co. Inc. (FELE, $53.31): “Franklin Electric Running Dry After Pumping All Time Highs”

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.


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