Will Weak End Markets Hurt Flowserve's (FLS) Q3 Earnings?

We expect Flowserve Corporation (NYSE:FLS) to beat on earnings in third-quarter 2017. The company is scheduled to release its results on Nov 1, after the closing bell.

The company missed earnings by 50% in the last reported quarter. Overall, Flowserve has an average negative surprise of 7.3% for the trailing four quarters, marked by two earnings beats for as many misses.

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

Factors to Drive Better-than-Expected Results

Flowserve had a difficult second quarter, as its earnings missed by half, dragged by precipitous top-line decline, owing to macroeconomic volatility and foreign currency headwinds. Since the company did not anticipate any major turnaround in the adverse geopolitical environment and weak end markets, we expect these factors to cast a shadow on the upcoming quarterly results as well.

The company has been witnessing acute weakness across its segments. Flowserve’s Flow Control Division (FCD), which witnessed 13.2% year-over-year decline in revenues in the prior quarter, will likely be weak in the coming results as well, owing in part to 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 $272 million, reflecting dismal contraction of 16% year over year.

Likewise, its Engineered Product Division is projected to decline 9.4% year over year to $424 million in the upcoming results, marred by soft customer original equipment sales in key end markets. Industrial Product Division sales will also likely be hurt by low original equipment sales and we expect the segment sales to go down 11.7% year over year to $188 million.

Flowserve Corporation Price, Consensus and EPS Surprise

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

We believe the company’s top line in the third quarter might benefit slightly from modest natural gas investments in North America and Asia. Also, increased bidding activity in the desalination space is anticipated to bolster sales. This apart, the company’s restructuring initiatives over the past few quarters are anticipated to prove conducive to third-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. These initiatives helped the company garner savings of $21 million in second-quarter 2017. Further, Flowserve is planning to trim its workforce by 15-20% as compared to the 2015 levels, as well as shift manufacturing to lower cost regions. We believe savings from these restructuring activities will boost profits in the upcoming quarter.

Earnings Whispers

Our proven model does not conclusively show that Flowserve will likely beat earnings estimates in this quarter. This is because a stock needs to have both 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 -5.21%. This is because the Most Accurate estimate is pegged at 32 cents, lower than the Zacks Consensus Estimate of 34 cents.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.

It should be noted that 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:

Terex Corporation (NYSE:TEX) , with an Earnings ESP of +3.17% and a Zacks Rank of 2, is expected to release quarterly numbers around Nov 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Mylan N.V. (NASDAQ:MYL) , with an Earnings ESP of +3.92% and a Zacks Rank of 2, is slated to report results on Nov 6.

Scripps Networks Interactive, Inc (NASDAQ:SNI) has an Earnings ESP of +5.10% and a Zacks Rank #3. The company is likely to release earnings on Nov 6.

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