It has been about a month since the last earnings report for Flowserve (FLS). Shares have lost about 0.1% in that time frame, outperforming 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 Q1 Earnings Beat Estimates, Improve Y/Y
Flowserve reported better-than-expected results for the first quarter of 2019, with a positive earnings surprise of 20.6%. However, sales lagged estimates by 5.2%.
This machinery company's adjusted earnings in the reported quarter were 41 cents per share, surpassing the Zacks Consensus Estimate of 34 cents. Further, the bottom line increased 51.9% from the year-ago figure of 27 cents on the back of benefits from transformation initiatives.
Weak Pump Division Lowers Revenues
In the quarter under review, Flowserve's sales were $890.1 million, reflecting a year-over-year decline of 3.3%. Results were adversely impacted by 5% from unfavorable movements in foreign currencies and divested businesses.
Also, the top line lagged the Zacks Consensus Estimate of $939.1 million.
Aftermarket sales in the reported quarter increased 3.3% year over year (or grew 7.9% on a constant-currency basis) to $470 million. Furthermore, original equipment sales totaled $420 million, reflecting a year-over-year decline of 9.7% (or 6.9% on a constant-currency basis).
Bookings totaled $1.07 billion, reflecting growth of 14.9% or 19.3% on a constant-currency basis over the year-ago quarter. Of the end markets, booking strengthened in oil & gas end markets. Backlog at the end of the reported quarter was $2.1 billion.
The company reports net sales under two segments. A brief discussion on those is provided below:
Revenues from the Flowserve Pump Division were $609.4 million, decreasing 5.4% year over year or down 1.8% on a constant-currency basis. Bookings increased 24.2% year over year (or 29% on constant currency) to $750.2 million.
Revenues from the Flow Control Division were $282.1 million, increasing 1.8% year over year or 5.3% on a constant-currency basis. Bookings of $319.8 million declined 2.3% year over year or increased 1% on constant currency.
Margins Improve
In the quarter under review, Flowserve's adjusted cost of sales decreased 7.9% year over year to $590.5 million. It represented 66.3% of sales compared with 69.7% in the year-ago quarter. Adjusted gross profit increased 7.5% to $299.6 million while gross margin increased 340 basis points (bps) year over year to 33.7%. Selling, general and administrative expenses decreased 2.4% year over year to $214.2 million. It represented 24.1% of sales.
Adjusted operating income in the quarter under review increased 40.6% year over year to $87.7 million. Moreover, adjusted operating margin grew 310 bps to 9.9%. Net interest and other expenses in the quarter were flat year over year at $12.4 million.
Effective tax rate was 25.6% versus 27.5% in the year-ago quarter.
Balance Sheet and Cash Flow
Exiting the first quarter, Flowserve had cash and cash equivalents of $637.7 million, up 2.9% from $619.7 million at the end of the last reported quarter. Long-term debt balance decreased 1.6% sequentially to $1,392.2 million.
In the first quarter, the company generated net cash of $38.5 million from operating activities versus net cash used of $120.7 million in the year-ago quarter. Capital expenditure totaled $10.6 million, decreasing 21.1% from $13.5 million spent in the previous year. During the quarter, the company used $24.9 million for distributing dividends.
Outlook
Flowserve is progressing well with transformation initiatives. The multi-year Flowserve 2.0 strategy will help in simplifying the operating model and spur growth.
The company maintained its projections for 2019. Adjusted earnings per share are predicted to be $1.95-$2.15, suggesting an increase from $1.75 recorded in 2018. Revenues are anticipated to increase 4-6%. Adjusted tax rate for the year is predicted to be 26-28%. Net interest expenses are predicted to be $55-$57 million and capital expenditure is expected to be $90-$100 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
VGM Scores
Currently, Flowserve has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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 this revision indicates a downward shift. Notably, Flowserve has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
Flowserve Corporation (NYSE:FLS
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