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Flowserve Unlikely to Stage a Comeback Soon: Here's Why

Zacks Equity Research

For more than two years now, premium industrial and environmental machinery provider, Flowserve Corporation FLS, has been plagued by familiar macroeconomic woes that have severely maligned the performance firms tied to the energy complex. Year to date, the company’s shares have lost 5.0%, in stark contrast to the Zacks categorized Machinery-General Industrial industry’s average positive return of 6.3%.

Downward estimate revisions for the stock over the past couple of months may add to investors’ woes. With nine downward revisions and no upward revision in the past two months, the Zacks Consensus Estimate for fiscal 2017 earnings has declined from $2.19 to $1.77 per share.

We have ample reasons to believe that Flowserve is unlikely to see any major recovery in the near-term, as present challenges are expected to persist for most of 2017. Here are the major factors that are expected to thwart growth.

Macro Woes Galore

Flowserve’s biggest challenge comes in the form of capital spending constraints and aftermarket push outs. These are severely restricting top-line growth. With the weaknesses lingering, capital budgets are expected to remain pressurized for first-half of 2017. The company warned investors that the first-quarter of 2017 is likely to be the worst hit by seasonal factors, including lower beginning backlog, loss of top-line leverage, increased under-absorption, and raised selling and administrative expense.

Flowserve is facing dearth of middle and larger sized project opportunities along with cost reduction and project delivery postponement pressures by customers. In the recent past, the company’s operations have suffered from project delays, rolling maintenance deferrals, and extended timelines for both order placement and delivery acceptance. This is making matters worse.

Tepid revenues, together with ongoing profit pressure, are expected to offset most of the benefits of strong execution from internal initiatives, thereby stagnating bottom-line performance. Sales and margins performance are expected to worsen amid intensifying volume deleverage absorption issues and macro uncertainty. In particular, aftermarket bookings decline is expected to play a major spoilsport on sales and under absorption is expected to slash margins.

Sustained project push outs throughout the energy complex—due to precipitous fall-off in crude oil prices since late 2014—are discouraging. The industry’s current volatility and increased focus on liquidity and cost reduction is expected to affect the company’s near-term demand. With overall weakness within the chemical and power markets, waning maintenance works, absence of large projects and slowdown in key geographies, we believe the Zacks Rank #5 (Strong Sell) company is unlikely to stage a comeback soon.

Stocks to Consider

Better-ranked stocks in the broader sector include Applied Industrial Technologies Inc. AIT, Barnes Group, Inc. B and Middleby Corp. MIDD. All three stocks hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Applied Industrial Technologies has managed to beat estimates thrice in the past four quarters, for a positive earnings surprise of 6.2%.

Barnes Group has a solid earnings surprise history for the trailing four quarters, having beaten estimates thrice, for an average beat of 4.4%.

Middleby Corporation beat earnings in each of the trailing four quarters, resulting in an average surprise of 15.9%.

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Flowserve Corporation (FLS): Free Stock Analysis Report
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