Technology

Flowserve (FLS) Up 2% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Flowserve (FLS). Shares have added about 2% in that time frame, underperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

Flowserve Beats on Q2 Earnings & Sales, Updates View

Flowserve reported better-than-expected results in the second quarter of 2020, with earnings beating estimates by 82.8%. Also, sales in the quarter surpassed estimates by 3.8%.

The machinery company’s adjusted earnings in the reported quarter were 53 cents per share, surpassing the Zacks Consensus Estimate of 29 cents. Further, the bottom line decreased 1.9% from the year-ago figure of 54 cents due to weak sales generation, partially offset by improved operating margin.

Revenue Details

In the quarter under review, Flowserve’s sales were $925 million, reflecting a year-over-year decline of 6.6%. Notably, unfavorable movements in foreign currencies adversely impacted sales by 2.4%.

However, the company’s revenues surpassed the Zacks Consensus Estimate of $890.9 million.

Aftermarket sales in the reported quarter were down 7.1% year over year (or 5% on a constant-currency basis) to $462.2 million. Furthermore, original equipment sales totaled $462.8 million, reflecting a year-over-year decrease of 6.1% (or 3.3% on a constant-currency basis).

Bookings totaled $808.3 billion in the quarter, reflecting a decline of 26.9% (or 25.1% decline on a constant-currency basis) from the year-ago quarter. Of the end markets, booking decreased in oil & gas. Backlog at the end of the reported quarter was $2.1 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 $674.1 million, decreasing 0.1% year over year or increasing 2.8% on a constant-currency basis. Bookings fell 29.6% year over year to $536.5 million.

Revenues from the Flow Control Division were $252.2 million, declining 20.4% year over year or down 19.1% on a constant-currency basis. Bookings of $274.6 million declined 20.7% year over year.

Margin Profile

In the quarter under review, Flowserve’s adjusted cost of sales increased 6% year over year to $628 million. It represented 67.9% of sales compared with 67.5% in the year-ago quarter. Adjusted gross profit decreased 7.7% year over year to $297 million, while margin fell 40 basis points (bps) year over year to 31.2%. Selling, general and administrative expenses fell 9.6% year over year to $193.1 million. It represented 20.9% of sales.

Adjusted operating income in the quarter under review decreased 4.4% year over year to $107 million. However, adjusted operating margin improved 30 bps to 11.6%. Net interest and other expenses in the quarter grew 4.7% year over year to $12.6 million. Effective tax rate was 24.7% versus 26% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the second quarter of 2020, Flowserve had cash and cash equivalents of $561.7 million, down 9.7% from $622.3 million at the end of the last reported quarter. Long-term debt grew 0.8% sequentially to $1,367.5 million.

In the first half of 2020, it generated net cash of $21.23 million from operating activities, down 57% from the year-ago comparable period. Capital expenditure in the period totaled $32 million, increasing 26.5% from $25.3 million spent in the first half of 2019.

During the period, the company used $52.1 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. This along with solid backlog will help drive performance in 2020. However, the pandemic-related woes and energy market volatility are concerning.

The company kept its projections suspended for 2020. However, it expects earnings to exceed the first-half 2020 number of 73 cents per share. Revenues and bookings in the second half are expected to be flat compared with the first half.

Also, a cost-reduction of $100 million is anticipated to be realized in 2020.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

At this time, Flowserve has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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 looks promising. Notably, Flowserve has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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