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Why You Should Dump Flowserve Stock From Your Portfolio


Flowserve Corp. FLS has been grappling with precipitous top-line decline, dragged by macroeconomic volatility and foreign currency headwinds.

Sluggish progress of the Industrial Product Division turnaround, customer delays in product pick-up and significantly high tax rate are some of the factors that have been plaguing the company’s profits in recent times. Flowserve also gave a disappointing guidance for 2017 in its last reported quarterly results.

Investors are abandoning the stock in droves, in light of the miserable guidance and the all-pervasive weakness. The stock has declined 6.9% in the past six months, much worse than the industry’s gain of 16.9%.

With respect to segments, the company’s Engineered Product Division revenues have been suffering due to negative currency translation effects, along with lower original equipment sales in the Americas and Africa. The Flow Control Division has also been hit by currency headwinds and soft customer original equipment sales in the key end markets, in recent times.

Concurrent with the earnings report, Flowserve reduced its 2017 guidance and now expects adjusted earnings per share guidance to lie in the band of $1.30-$1.50 (previous guidance: $1.55-$1.85). It estimates revenues to decline in the range of 6-10%.

Furthermore, the company does not anticipate any major turnaround in the current geopolitical environment and end markets for 2017. Factors including currency rates, commodity prices, expected bookings and market volatility are likely to put pressure on both the top- and bottom-line performances for this year.

Not surprisingly, the analyst community has also been distinctly bearish on the stock in recent times. Flowserve’s earnings estimates continued to moved south sharply over the past 60 days, with the Zacks Consensus Estimate for 2017 earnings plunging from $1.52 to $1.38, on the back of eight downward estimate revisions versus none upward.

Flowserve Corporation Price and Consensus

Undoubtedly, Flowserve has had a choppy first half of the year. Its biggest challenge comes in the form of capital spending constraints and aftermarket push outs. In the recent past, the company’s operations suffered from project delays, rolling maintenance deferrals, and extended timelines for both order placement and delivery acceptance. We believe Flowserve will continue to witness challenging times in the second half of the year.

On the other hand, relative stability of oil at around the level of $45-$50 over the past couple of quarters is a major positive for the company. It appears that Flowserve’s orders are finally showing signs of bottoming out, signaling brighter days ahead. We believe stabilization in core aftermarket activities bodes well for long-term growth of the company, going forward.

Nevertheless, there is no denying the fact that this Zacks Rank #5 (Strong Sell) company’s waning top-line performance remains a major concern.

Stocks to Consider

Better-ranked stocks in the broader space include Barnes Group Inc. B, Altra Industrial Motion Corp. AIMC and Graco Inc. GGG, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Barnes Group has a solid earnings surprise history for the trailing four quarters, having beaten estimates each time for an average of 11.6%.

Altra Industrial Motion also has a robust earnings surprise history, with an average beat of 17% for the last four quarters, beating estimates strongly throughout.

Graco generated an impressive average positive surprise of 24% during the same time frame, surpassing estimates each time.

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