A month has gone by since the last earnings report for Flowserve Corporation (FLS - Free Report) . Shares have lost about 7.7% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Flowserve Beats on Q4 Earnings & Revenue Estimates
Flowserve posted an earnings beat in fourth-quarter 2016, marking a reversal to the miss trend set over the trailing four quarters. The company’s fourth-quarter 2016 adjusted earnings of $0.72 per share topped the Zacks Consensus Estimate of $0.65 by 10.8%.
However, on a reported basis, the company’s earnings per share fell 7.4% to $0.50 on a year-over-year basis. Precipitous top-line decline owing to macroeconomic volatility as well as foreign currency headwinds proved to be major drags for the bottom line.
For full-year 2016, the company’s adjusted earnings per share came in at $2.19, down 28.7% year over year.
Quarter in Detail
Revenues fell 16.6% year over year to $1074.6 million. However, revenues surpassed the Zacks Consensus Estimate of $1067 million. Apart from lower sales across all three sub-segments, negative currency impact also dragged down revenues.
For full-year 2016, the company’s top line declined by 12.5% to $3991.4 million compared to the year-ago tally. Weak original equipment sales across all geographies (except Middle East) were largely attributable to the top-line decline.
The company’s bookings totaled $908 million in fourth-quarter 2016, down 4.2% year over year at constant currency (cc). After-market bookings totaled $446 million and were also flat at cc. Bookings were also hit by negative currency impact. In addition, prolonged softness in the oil and gas industry and the chemical and general industries hurt customer original equipment bookings, aggravating the decline.
Operating income of the company came in at $107.8 million compared with $136.8 million recorded in the year-ago period. Foreign currency headwinds and lower gross profits resulted in operating loss. Also, adjusted gross margins contracted 20 bps to 33.2%. Dismal sales, unfavorable impact of short-term operational inefficiencies and lower margin projects were major dampeners.
Engineered Product Division revenues were down 19.9% year over year to $553.4 million in the quarter. Negative currency translation effects, along with lower aftermarket and original equipment sales in key end markets, mainly stemmed the revenue decline. Additionally, bookings were down 5.0% year over year to $437.0 million, primarily due to currency headwinds, and softness in oil & gas and general industries.
Sales at the Flow Control Division declined 12.6% year over year to $318.2 million, hit by currency headwinds and soft customer original equipment sales in key end markets. Bookings fell 8.5% year over year to $304.1 million, owing to lower orders from the oil and gas industry.
Moreover, Industrial Product Division sales were down 13.6% year over year to $221.4 million. Foreign currency headwinds, along with low original equipment sales, resulted in the decline across all main geographies. Furthermore, bookings were down 4.6% to $188.5 million, chiefly because of dismal bookings in the oil & gas, power generation and chemical industries.
Currently, the company is following its $400-million multi-year investment, which is anticipated to result in savings of $195 million in 2017. In 2018, savings from the full annualized program are expected at $230 million. These investments are aimed at streamlining management structure, reducing manufacturing costs and implementing cost-saving measures for the overall optimization of the cost structure.
The company also expects to trim its workforce by 15–20% and manufacturing footprint by 30% compared with the 2015 level, as well as shift manufacturing to lower cost regions, under this $400 million worth of restructuring initiative.
In relation to the restructuring efforts, the company spent about $34 million in fourth-quarter 2016, which in turn led to incremental savings of $12 million. For full-year 2016, it incurred an expenditure of $104 million as realignment charges and this resulted in savings of $93 million. Flowserve remains optimistic to complete the $400-million program in 2017. It will likely incur an expense of $155 million and result in $70 million of additional savings.
Balance Sheet & Cash Flow
Flowserve ended the quarter with cash and cash equivalents of $367.2 million compared with $366.4 million as of Dec 31, 2015. On Dec 31, 2016, the company’s long-term debt totaled $1,485.3 million, down from $1,560.6 million as of Dec 31, 2015.
The company’s net cash flow provided by operating activities came in at $227.6 million for the 12-month period ended Dec 31, 2016, significantly below $418.1 million recorded in the prior-year period.
Concurrent with the fourth-quarter 2016 results, Flowserve offered its 2017 guidance. The company expects adjusted earnings per share guidance to lie in the band of $1.55–$1.85. Flowserve estimates revenues to decline in the range of 6–14%.
Flowserve does not anticipate any major turnaround in the current geopolitical, end market and macro uncertainties for 2017. Factors including currency rates, commodity prices, expected bookings and market volatility are likely to put pressure on both the top- and bottom-line performances for this year.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been four revisions lower for the current quarter. In the past month, the consensus estimate has shifted lower by 45.7% due to these changes.
At this time, Flowserve's stock has an average Growth Score of 'C', though it is lagging a lot on the momentum front with a 'F'. Following the exact same course, the stock was allocated also a grade of 'F' on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for growth based on our styles scores.
Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #5 (Strong Sell). We are expecting a below average return from the stock in the next few months.