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Flowserve’s (FLS) Woes Continue: Time to Dump the Stock?


Shares of industrial and environmental machinery supplier, Flowserve FLS, has yielded a negative 3.7% return for the past six months, in stark contrast to the Zacks categorized Machinery-General industry's positive 12.7%. In addition, the company has a dismal track record, having missed estimates each time in the trailing four quarters with an average negative surprise of 7.7%.

Also, analysts are becoming increasingly bearish on the stock over the past couple of months with estimate revisions moving south. With ten downward revisions compared with no upward revision in the past two months, the Zacks Consensus Estimate for fiscal 2016 earnings has declined from $2.42 to $2.14 per share.

Here’s discussing major factors that are marring the company’s prospects.

Factors Thwarting Growth

Flowserve’s dismal performance over the past few quarters is largely attributable to the macroeconomic concerns plaguing the most well managed companies. The company is vulnerable to cyclicality primarily in the oil & gas, general industrial and chemical industries. Oil & gas spending continues to decline in both upstream and midstream channels in the Middle East. Capital spending deferrals as well as reduced activity in its key markets are expected to be major challenges in the upcoming quarters as well.

Flowserve is facing a lack of mid- and large-sized project opportunities, along with cost reduction and project delivery postponement pressures by customers. The company has cut guidance twice during the year, thus miffing investors more. The downcast outlook reflects the ongoing sluggishness in global macroeconomic conditions and lack of visibility in end-markets.

Flowserve slashed its 2016 adjusted earnings per share guidance range of $2.05 to $2.25 from the previous $2.40 to $2.60. Also, the company revised the lower limit of its revenue guidance downward. In addition, persistent weakness in commodity prices and reduced visibility in many of its key markets are marring the company’s top-line performance.

FLOWSERVE CORP Price and Consensus

Though Flowserve has been focusing on cost control and strategic restructuring to offset some of the negatives, we believe these activities will not be able to achieve the full cost-savings run-rate anytime soon owing to the intensity of the short-term challenges. This is because Flowserve’s niche verticals are tied to the energy complex, which is witnessing prolonged weakness without any respite in sight.

In addition, the company has been facing extreme operational uncertainties in several regions like Asia-Pacific, North America, Middle East and Latin America, which affected the top line. Going forward, new investments and maintenance activities continue to face headwinds in North America. Given the overall softness in broad-based industrial spending, we believe the company is unlikely to stage a comeback any time soon.

Other Stocks to Consider

Other favorably placed stocks in the broader sector include II-VI Incorporated IIVI, Applied Industrial Technologies Inc. AIT and The Middleby Corporation MIDD. While II-VI Incorporated sports the same Zacks Rank as EnerSys, Applied Industrial and Middleby Corporation carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

II-VI Incorporated has registered a remarkable positive average surprise of over 39.8% in the four trailing quarters, driven by four strong consecutive beats.

Applied Industrial Technologies has managed to beat estimates twice in the trailing four quarters and has a positive earnings surprise of 4.9%.

Middleby Corporation beat earnings in each of the trailing four quarters, resulting in an average surprise of 15.9%.

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