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Flowserve (FLS) Down 13.2% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Flowserve (FLS - Free Report) . Shares have lost about 13.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Flowserve due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Flowserve Posts Upbeat Q3 Earnings and Revenues

Flowserve reported better-than-expected bottom-line results for the third quarter of 2018, delivering a positive earnings surprise of 16.7%.

This machinery company's adjusted earnings were 49 cents per share, surpassing the Zacks Consensus Estimate of 42 cents. Moreover, the bottom line increased 32.4% from the year-ago figure of 37 cents, primarily on the back of sales growth.

Segmental Performance Drives Revenues

In the quarter under review, Flowserve's sales were $952.7 million, reflecting growth of 7.8% from the year-ago quarter. Notably, the sales growth was partially offset by 1% negative impact from divested businesses.

Moreover, the top line surpassed the Zacks Consensus Estimate of $921 million by 3.4%.

Aftermarket sales in the reported quarter grew 3.9% year over year (or 5% on a constant-currency basis) to $457 million. Furthermore, original equipment sales totaled $496 million, reflecting growth of 11.8% (or 12.5% on a constant-currency basis).

Bookings totaled more than $1 billion, reflecting growth of 13.2% from the year-ago quarter. Backlog at the end of the reported quarter was $1.9 billion, reflecting an increase of 1.4% sequentially.

The company reports its net sales in three segments, a brief discussion of those are provided below:

Revenues from the Engineered Product Division were $466.2 million, increasing 9.9% year over year or 10.3% on a constant-currency basis. Bookings increased 20.2% to $519.8 million.

Revenues from the Industrial Product Division totaled $199.1 million, increasing 5% year over year or 6.1% on a constant-currency basis. Bookings were solid in the quarter under review, increasing 1.5% to $199.8 million.

Revenues from the Flow Control Division were $306.2 million, increasing 6.4% year over year or 7.9% on a constant-currency basis. Bookings of $314.2 million jumped 9.9%.

Margin Profile

In the quarter under review, Flowserve's adjusted cost of sales increased 4.7% year over year to $644.2 million. It represented 67.6% of sales compared with 69.7% in the year-ago quarter. Adjusted gross margin increased 130 basis points (bps) to 33.2%. Selling, general and administrative expenses increased 17.4% to $241.9 million. It represented 25.4% of sales.

Adjusted operating income in the quarter under review increased 26.5% year over year to $105 million. Moreover, adjusted operating margin grew 160 bps to 11%. Effective tax rate was 28.8% compared with 27% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the third quarter, Flowserve had cash and cash equivalents of $529.9 million, up 2.4% from $517.4 million at the end of the last-reported quarter. Long-term debt balance decreased 1.3% sequentially to $1,436.7 million.

In the first nine months of 2018, the company generated net cash of $26.3 million from operating activities compared with $72.4 million in the year-ago period. Capital expenditure amounted to almost $50 million compared with $40.6 million in the first nine months of 2017.

During the first three quarters of 2018, the company used $74.5 million for distributing dividends.

Outlook

Flowserve is progressing well with its transformation initiatives. The multi-year Flowserve 2.0 strategy will help in simplifying the operating model and spur growth.

The company currently expects adjusted earnings per share in the range of $1.65-$1.75 compared with the earlier guided range of $1.50-$1.70. Revenues are currently projected to increase 5-7% compared with 3-6% growth mentioned previously. Adjusted tax rate for the year is predicted to be 27-28%.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Flowserve has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Flowserve has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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