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Flowserve Plagued by Weak Revenues, Turnaround Unlikely

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Flowserve Corp. (FLS - Free Report) has been facing numerous headwinds in recent times, as evidenced by its dismal second-quarter 2017 results. Precipitous top-line decline, owing to macroeconomic volatility as well as foreign currency headwinds dragged profits for the company.

The figures were hurt by sluggish progress of the Industrial Product Division turnaround, customer delays in product pick-up and significantly high tax rate. In fact, the company’s adjusted earnings missed the Zacks Consensus Estimate by a whopping 50%. Flowserve also gave a disappointing guidance for 2017.

Investors are abandoning the stock in droves, in light of the miserable guidance and the all-pervasive weakness. The stock has declined 14.5% in the past month, much worse than the industry’s decline of 2.1%.

With respect to segments, its Engineered Product Division revenues were down 16.6% year over year, dragged by negative currency translation effects, along with lower original equipment sales in the Americas and Africa, which crippled the sales of this segment.

Sales at the Flow Control Division also declined 13.2% year over year, hit by currency headwinds and soft customer original equipment sales in the key end markets.Moreover, Industrial Product Division sales were down 10.8% year over year.

Concurrent with the earnings report, Flowserve reduced its 2017 guidance and now expects adjusted earnings per share guidance to lie in the band of $1.30-$1.50 (previous guidance: $1.55-$1.85). It estimates revenues to decline in the range of 6-10%.

Furthermore, the company does not anticipate any major turnaround in the current geopolitical environment and end markets 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.

Not surprisingly, the analyst community has also been distinctly bearish on the stock in recent times. Flowserve’s earnings estimates have moved south sharply in the past 30 days, with the Zacks Consensus Estimate for 2017 earnings plunging from $1.79 to $1.41, on the back of eight downward estimate revisions versus none upward.

Flowserve Corporation Price and Consensus

Undoubtedly, Flowserve has had a choppy first half of the year. Its biggest challenge comes in the form of capital spending constraints and aftermarket push outs. In the recent past, the company’s operations suffered from project delays, rolling maintenance deferrals, and extended timelines for both order placement and delivery acceptance. We believe Flowserve will continue to witness challenging times in the second half of the year.

On the other hand, relative stability of oil at around the level of $45-$50 over the past couple of quarters is a major positive for the company. It appears that Flowserve’s orders are finally showing signs of bottoming out, signaling brighter days ahead. We believe stabilization in core aftermarket activities bodes well for long-term growth of the company, moving ahead.

Other key strengths include strong operational model, solid productivity, and considerable aftermarket content and geographical diversity. In particular, the diligent restructuring efforts are starting to manifest themselves in substantial savings. Despite these positives, there is no denying the fact that this Zacks Rank #5 (Strong Sell) company’s waning top-line performance remains a major concern.

Stocks to Consider

Some better-ranked stocks in the broader space include Barnes Group Inc. (B - Free Report) , Applied Industrial Technologies, Inc. (AIT - Free Report) and Graco Inc. (GGG - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Barnes Group has a solid earnings surprise history for the trailing four quarters, having beaten estimates each time for an average of 11.6%.

Applied Industrial Technologies also has a robust earnings surprise history, with an average beat of 10.1% over the trailing four quarters, beating estimates throughout.

Graco generated an impressive average positive surprise of 24% over the trailing four quarters, surpassing estimates each time.

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