Why Is Flowserve (FLS) Down 51.1% Since Last Earnings Report?

A month has gone by since the last earnings report for Flowserve (FLS). Shares have lost about 51.1% 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 its most recent earnings report in order to get a better handle on the important drivers.

Flowserve Q4 Earnings & Sales Beat Estimates, Rise Y/Y

Flowserve reported better-than-expected results in the fourth quarter of 2019, with earnings beating estimates by 1.5%. This was the fourth consecutive quarter of impressive results.

The machinery company’s adjusted earnings in the reported quarter were 66 cents per share, surpassing the Zacks Consensus Estimate of 65 cents. Further, the bottom line grew 13.8% from the year-ago figure of 58 cents, driven by progress on the Flowserve 2.0 transformation strategy and improved operating leverage.

For 2019, the company’s adjusted earnings per share were $2.20, beating the Zacks Consensus Estimate of $2.19. Also, the bottom line improved 25.7% year over year.

Segmental Revenues

In the quarter under review, Flowserve’s sales were $1,068.2 million, reflecting year-over-year growth of 8.2%. Notably, unfavorable movements in foreign currencies adversely impacted sales by 1.1%.

The company’s revenues surpassed the Zacks Consensus Estimate of $1,048 million by 1.9%.

Aftermarket sales in the reported quarter rose 5.3% year over year (or grew 6.6% on a constant-currency basis) to $522 million. Furthermore, original equipment sales totaled $546 million, reflecting year-over-year growth of 11.3% (or 12.1% on a constant-currency basis).

Bookings totaled $1.05 billion in the quarter, reflecting a marginal increase of 0.7% (or 1.7% on a constant-currency basis) from the year-ago quarter. Of the end markets, booking strengthened in oil & gas, chemical, and water end markets. Backlog at the end of the reported quarter was $2.16 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 $739.5 million, improving 11.6% year over year or 12.7% on a constant-currency basis. Bookings grew 3.8% year over year to $756 million.

Revenues from the Flow Control Division were $330.2 million, rising 1.3% year over year or 2.2% on a constant-currency basis. Bookings of $298.6 million declined 6.1% year over year.

For 2019, the company’s sales totaled $3.94 billion, reflecting growth of 2.9% from the previous year. Also, the top line surpassed the Zacks Consensus Estimate of $3.92 billion.

Margin Profile

In the quarter under review, Flowserve’s adjusted cost of sales increased 9.2% year over year to $714 million. It represented 66.8% of sales compared with 66.3% in the year-ago quarter. Adjusted gross profit grew 6.4% year over year to $354.2 million, while margin fell 50 basis points (bps) year over year to 33.2%. Selling, general and administrative expenses rose 5.3% year over year to $230.2 million. It represented 21.6% of sales.

Adjusted operating income in the quarter under review improved 7.5% year over year to $126.5 million. Moreover, adjusted operating margin fell 10 bps to 11.8%. Net interest and other expenses in the quarter grew 4.2% year over year to $12.8 million. Effective tax rate was 22.2% versus 26.1% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the fourth quarter of 2019, Flowserve had cash and cash equivalents of $671 million, up 22.6% from $547.3 million at the end of the last reported quarter. Long-term debt grew 1.2% sequentially to $1,366 million.

During 2019, the company repaid debts of $105 million.

In 2019, it generated net cash of $312.7 million from operating activities, up 63.9% from the previous year. Capital expenditure in the year totaled $66.2 million, declining 21.2% from $84 million spent in 2018.

During the year, the company used $99.6 million for distributing dividends and $15 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. This along with solid backlog will help drive performance in 2020. However, geopolitical and macroeconomic issues are concerning.

The company anticipates adjusted earnings per share of $2.30-$2.45 for 2020. Revenues are anticipated to increase 3-5%.

Net interest expenses in the year will likely be $45-$50 million, while adjusted tax rate for the year is expected to be 24-26%. Capital expenditure is predicted to be $90-$100 million.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.

VGM Scores

Currently, Flowserve has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile 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

Flowserve has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.