Description

          Flow International has been posted twice before on VIC ( at the end of the preceding year Dec 31,2008 by rrjj52 and earlier in 2001 by solasis11). Given the significant market decline in 2009,  we believe it warrants another writeup  as prices have come down materially and we think there is a material upside to the stock from the current market price. We will summarize the background on the company but for more historical detail,  we would read the past writeups.

         Flow International (Flow) - 2.30  is the world's undisputed leader in waterjets and before you ask, waterjets use high pressured water to cut many items as metals, wood and clean many items. Flow designs, develops, manufactures, sells, installs and services these ultra high pressure products to the industrial, semiconductors, aerospace, manufacturing, food as well as marine and industrial cleaning markets, utilizing environmentally correct and technologically advanced solutions.

           And exciting products they are, with  precision  capabilities to cut metals including titanium, glass, stone, carbon fiber composites etc  into any shape in a single step. Materials from 1/16 inch to over 8 inches thick are grist for Flow's machines. In addition,Flow offers custom robotic systems for factory automation and consumable parts and services for it wide array of products. Waterjet technology is winning share of market worldwide displacing old line machine tool cutting. Its attractiveness stems from a high return on purchase compared to traditional machine tool cutting.

           Current share estimates of domestic market suggest 15% share with less worldwide but growing. Some of the newer uses include work with wind turbines as well as the military and their carbon fiber composites used on vehicles in Iraq.

           Tied at the hip to the machine tool market, obviously our pick is cyclical. The recession took its toll on Flow and its brethren, plunging stock prices some 80% and more with Flow declining from May 2008 high of $11.40 to a March 2009 low of $1.05- a thunderous 92% collapse.

           Insiders took this decline as an opportunity to load up on shares over the past six months with five officers and directors buying about 223,000 shares at an average price $1.70 or so. Having studied insider trends since the early sixties, we can say this is a strong vote of confidence on behalf of management as to the future of this company.

           The recession obviously has taken its toll on sales and profits. For the year ended April 2009, we estimate revenues of about $220 million down from year earlier figure of $247 million. Profits declined from  $ 0.34 in 4/08 to a deficit in 4/09. Management started an aggressive cost cutting program, reducing global headcount 14% and are estimating savings of $10 million in the 2010 fiscal.

           Financial covenants in the first quarter were close to be violated and probably helped greatly in slamming the company's stock. But on June 11, Flow announced it had closed a $40 million, two year revolver senior secured credit facility which gives it greater flexibility in the current downturn.

          We should also note that management is expanding the scope of the company both domestically and worldwide. Flow announced that it has established a network of global distributors to supplement its direct sales channel. Additionally, Flow disclosed that a new Flow distribution network from ex-employees of the defunct third largest waterjet  manufacturer would  offer stepped down versions of its products and thereby broadening its product line. During the June 25 conference call, management announced  that they added seven additional distributors to a current total of twenty. Signing these agreements reaffirm our belief that their products are industry leading  and well regarded.

         Outside the US,  continued expansion in China, India, Southeast Asia and closer to home, Latin America, is ongoing, and all the while facing limited worldwide waterjet competition.

          What intrigues us about a company that is obviously cyclical, is a superior technology that is gaining share of market in the giant, giant machine tool industry. Flows' products find themselves on the manufacturing floor of Airbus, Boeing and other leading companies. Shares took a double hammering from financial as well as economic issues taking them lower then the normal expected damage from a recession. With financial issues solved, the stock in our opinion has not recovered from this extra hit and offers in our opinion an excellent risk-reward. Over the next twelve to eighteen months, we see a one point risk with a five point upside- a bet we will always take.

Catalyst

Business upturn