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Why Is Flowserve (FLS) Up 15.2% Since Last Earnings Report?

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It has been about a month since the last earnings report for Flowserve (FLS - Free Report) . Shares have added about 15.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Flowserve due for a pullback? 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 catalysts.

Flowserve Q1 Earnings Miss Estimates, Decline Y/Y

Flowserve reported first-quarter 2020 results, with earnings missing estimates by 48.8%.

The machinery company’s adjusted earnings in the reported quarter were 21 cents per share, lagging the Zacks Consensus Estimate of 41 cents. Further, the bottom line fell 48.8% from the year-ago figure of 41 cents due to temporary site closures on account of the coronavirus outbreak.

Segmental Revenues

In the quarter under review, Flowserve’s sales were $894.5 million, reflecting year-over-year growth of 0.5%. However, the company’s revenues missed the Zacks Consensus Estimate of $897 million by 0.3%.

Aftermarket sales in the reported quarter fell 6% year over year (or down 4.3% on a constant-currency basis) to $442.2 million. However, original equipment sales totaled $452.3 million, reflecting year-over-year growth of 7.7% (or up 9.5% on a constant-currency basis).

Bookings totaled $976.9 million in the quarter, reflecting a decline of 8.4% (or 6.6% on a constant-currency basis) from the year-ago quarter. Notably, bookings were down for both aftermarket and original equipment businesses. Backlog at the end of the reported quarter was $2.18 billion.

The company currently has two reportable segments — Flowserve Pump Division and Flow Control Division. A brief discussion on the segments is provided below:

Revenues from the Flowserve Pump Division were $635.7 million, improving 4.3% year over year or 6.2% on a constant-currency basis. Bookings fell 8.7% year over year to $685.1 million.

Revenues from the Flow Control Division were $260.3 million, declining 7.7% year over year or 6.4% on a constant-currency basis. Bookings of $296.3 million declined 7.3% year over year.

Margin Profile

In the quarter under review, Flowserve’s cost of sales increased 5.5% year over year to $628.5 million. It represented 70.3% of sales compared with 67% in the year-ago quarter. Adjusted gross profit declined 8.1% year over year to $275.4 million, while adjusted margin fell 290 basis points (bps) year over year to 30.8%. Selling, general and administrative expenses rose 18.7% year over year to $243.6 million. It represented 27.2% of sales.

Adjusted operating income in the quarter under review declined 40.3% year over year to $ 52.4 million. Moreover, adjusted operating margin fell 400 bps to 5.9%. Net interest and other expenses in the quarter grew 8.1% year over year to $13.4 million. Effective tax rate was 24.5% versus 25.6% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the first quarter of 2020, Flowserve had cash and cash equivalents of $622.3 million, down 7.3% from $671 million at the end of the last reported quarter. Long-term debt fell 0.7% sequentially to $1,357.1 million.

In the first three months of 2020, it generated net cash of $47.3 million from operating activities, up 22.9% from the year-ago comparable period. Capital expenditure in the quarter totaled $17.3 million, increasing 63.2% from $10.6 million spent in the year-ago quarter.

During the quarter, the company used $26 million for distributing dividends and $32.1 million for repurchasing shares.

Outlook

Flowserve is progressing well with transformation initiatives. The multi-year Flowserve 2.0 strategy will likely help in simplifying the operating model and spur growth. However, the duration of the coronavirus pandemic and the impacts on the demand for the company’s products and services will likely have a bearing on its results.

Notably, it has withdrawn its guidance for 2020 on end-market uncertainties, owing to the outbreak.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -23.13% due to these changes.

VGM Scores

Currently, Flowserve has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. 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 C. 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. It's no surprise Flowserve has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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