Flowserve: Compounding or Destroying Value?

I'm highly skeptical about the economic value of most share repurchase programs. To see why, look at the following graph of the total buyback dollar amount for the companies in the S&P 500, compared to the average price of the index on a quarterly basis:

Share buybacks for the S&P 500 accelerated in the second half of 2004, culminating in a sharp spike during the first two quarters of 2007 -- just as the stock market was peaking. Conversely, when stocks traded at bargain prices during the worst of the crisis, share buybacks dried up. Then, as stocks became more expensive during the rally that began in March 2009, companies once more became happy to step up the dollar amounts spent on share repurchases.

Still, not all buyback programs hurt shareholders. In order to praise smart capital allocators and shame those who fritter away shareholder capital, I've decided to evaluate individual share repurchase programs. Today, I'm looking at the new program established by engineering products and services supplier Flowserve (NYSE: FLS  ) .

How much, for how long?
The new $300 million share buyback authorization follows a $300 million program, which is almost complete. The company has placed no other restrictions on when it will buy shares or in what amounts.

How cheap is the stock?
Flowserve's buyback announcement specifically mentions the share price as one of the factors that will determine its ability to spend its authorization. That's a shame because the relationship between price paid and intrinsic value will determine whether the share purchases are compounding or destroying shareholder wealth. Just how cheap (or expensive) are Flowserve shares right now? Based on its price-to-earnings ratio, Flowserve trades toward the bottom of the range against four of its competitors:

Company	Forward P/E
Pentair (NYSE: PNR  )	12.1
Watts Water Technologies (NYSE: WTS  )	11.5
CIRCOR International	10.4
Flowserve	9.1
Timken (NYSE: TKR  )	6.7

Source: Capital IQ, a division of Standard & Poor's.

Is this a smart use of shareholder capital?
Flowserve's price-to-earnings multiple currently lies in the bottom half compared with the company's industry peers, the S&P 500, and its own five-year history. With shares trading at 9.1 times its earnings-per-share estimate for the next 12 months, Flowserve's share buyback program looks like a good use of shareholder capital at current prices. It's worth tracking Flowserve, and you can do it with our free application, My Watchlist.

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