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Flowserve (FLS) to Gain From Strong End Markets Amid Risks

Zacks Equity Research

On Jan 17, we issued an updated research report on Flowserve Corporation FLS.

Over the past month, this Zacks Rank #3 (Hold) stock has yielded a return of 3.5% compared with the industry’s growth of 2.2%.



Existing Scenario

Flowserve is well positioned to benefit from near-term opportunities in the chemical market on the back of an expected global demand growth, which is expected to spur investments in ethylene facilities. Also, given the company’s broad technical services offering, it is expected to gain from the opportunity in growing thermal solar market. Notably, at the end of third-quarter 2019, the company’s bookings increased 13% to $2.1 billion from 2018 end, driven by growth initiatives and strength in power and chemical markets.

Also, Flowserve’s focus on disciplined capital-allocation strategy bodes well. Notably, the company’s funds are primarily invested in enhancing organic growth and Flowserve 2.0, a multiyear program. It is worth mentioning here that Flowserve 2.0 is expected to enhance the company's ability to effectively support customers and create a better workplace for employees as well as drive significant long-term value for shareholders.

In addition, the company’s cash position remains impressive, as evident from about $120 million of year-over-year increase in cash flow from operating activities in the first nine months of 2019.

However, geopolitical uncertainties are affecting global spending and slowing down project timing in the oil and gas end markets. Also, issues like commodity pricing, trade disruption and the current geopolitical situation across the globe have caused delays in capital spending.

Moreover,in the last five years (2014-2018), Flowserve’s long-term debt balance jumped 5.1% (CAGR). At the end of third-quarter 2019, long-term debt was approximately $1,350.3 million and interest expenses incurred in the first nine months of 2019 was $42 million.

Further, analysts have become increasingly bearish about the company over the past 60 days. The company’s earnings estimates for 2020 have decreased from $2.46 to $2.43 on account of two downward estimate revisions against one upward.

Stocks to Consider

Some better-ranked stocks from the same space are DXP Enterprises, Inc. DXPE, IDEX Corporation IEX and Parker-Hannifin Corporation PH. While DXP Enterprises sports a Zacks Rank #1 (Strong Buy), IDEX and Parker-Hannifin carry a Zacks Rank #2 (Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

DXP Enterprises delivered positive earnings surprise of 17.67%, on average, in the trailing four quarters.

IDEX delivered positive earnings surprise of 3.26%, on average, in the trailing four quarters.

Parker-Hannifin delivered positive earnings surprise of 5.29%, on average, in the trailing four quarters.

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