Will Weak End Markets Dent Flowserve's (FLS) Q4 Earnings?

Flowserve Corporation (NYSE:FLS) is scheduled to report fourth-quarter 2017 results on Feb 15, after the closing bell.

The company beat earnings by 8.8% in the last quarter. Overall, Flowserve has an average negative surprise of 1.4% for the trailing four quarters, marked by three beats and a huge miss.

Let’s see how things are shaping up for this announcement.

Factors to Consider

In the third quarter, Flowserve’s pervasive revenue decline was offset by lower operating expenses, which also ensured an earnings beat. The company’s sales contracted across its segments, with bookings declining year over year. Additionally, cautious spending by clients, loss of sales leverage and related under-absorption has been hurting the company’s profits. Since the company did not project any major turnaround in the adverse geopolitical environment and weak end markets, the aforementioned factors are likely to dent the upcoming quarterly results.

The company has been witnessing persistent weakness across its segments, with the magnitude of the decline to be somewhat lower than in the previous quarters. Flowserve’s Flow Control Division (FCD), which witnessed a year-over-year decline of 3.9% in revenues in the prior quarter, is likely to be soft in the upcoming results. Revenues are anticipated to be affected by lower original equipment sales in the Americas and Africa.The Zacks Consensus Estimate for the FCD segment revenues in the to-be-reported quarter is pegged at $304 million, reflecting a fall of 2.9% year over year.

Likewise, sales in its Engineered Product Division are expected to decline 2.7% year over year to $533 million in the upcoming results. Revenues in the segment are likely to be marred by soft customer original equipment sales in key end markets. Industrial Product Division sales are expected to be hurt by low original equipment sales and persistent operation issues. We expect segment sales to inch down 1.4% year over year to $210 million.

Flowserve Corporation Price, Consensus and EPS Surprise

However, the company has been witnessing some stabilization in core aftermarket activities, which include parts, services and repairs, as markets return to regular maintenance schedules.

We believe that the company’s top line in the fourth quarter might benefit slightly from modest natural gas investments in North America and Asia. Also, higher bidding activity in the desalination space is expected to bolster sales. This apart, the company’s restructuring initiatives over the past few quarters are likely to prove conducive to fourth-quarter results.

Currently, the company is pursuing a $400-million multi-year investment plan, which is expected to result in $195 million of savings in 2017. Further, Flowserve is planning to trim workforce by 15-20% compared with the 2015 levels and shift manufacturing to low-cost regions. We believe that savings from these restructuring activities will boost profits in the upcoming quarter.

Earnings Whispers

Our proven model does not show that Flowserve is likely to beat earnings estimates in this quarter. This is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP for the company is currently pegged at -0.39%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Flowserve has a Zacks Rank #3. While this increases the predictive power of ESP, we need to have a positive ESP to be confident about an earnings surprise.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

The Boston Beer Company, Inc. (NYSE:SAM) has an Earnings ESP of +29.18% and a Zacks Rank of 1. The company is expected to release quarterly numbers around Feb 21. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ruth’s Hospitality Group Inc. (NASDAQ:RUTH) , with an Earnings ESP of +11.69% and a Zacks Rank of 1, is slated to report results on Feb 21.

Summit Hotel Properties, Inc. (NYSE:INN) has an Earnings ESP of +11.11% and a Zacks Rank #3. The company is likely to release earnings on Feb 21.

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