Here's Why it is Worth Holding on to Flowserve (FLS) Stock Now

We have issued an updated research report on Flowserve Corporation FLS on Jan 8.

This flow control systems provider currently carries a Zacks Rank #3 (Hold), a revision from the earlier Zacks Rank #2 (Buy). Its market capitalization is approximately $5.1 billion.

A few growth drivers and certain headwinds, which might influence Flowserve, have been discussed below.

Factors Favoring Flowserve

Impressive Results & Solid Outlook: In the third quarter of 2018, Flowserve delivered better-than-expected results, with an earnings beat of 16.67%. Further, it’s quarterly bottom-line results of 49 cents per share expanded 32.4% year over year on the back of sales growth and margin expansion.

For 2018 (results not yet released), healthy demand in end-markets served, realignment initiatives and lower tax rates (of 27-28% versus 30% in 2017) will be beneficial, and aid bottom-line growth. The company anticipates adjusted earnings of $1.65-$1.75 per share, higher than $1.50-$1.70 mentioned earlier and roughly 25% (at the mid-point) year over year.

Solid results and outlook also lifted sentiments for Flowserve, which is evident from positive revision in bottom-line estimates. In the past 60 days, the stock’s earnings estimates for 2018 have been raised by six brokerage firms while that for 2019 has been raised by four firms and lowered by three. Currently, the Zacks Consensus Estimate for earnings is pegged at $1.75 for 2018 and $2.19 for 2019, reflecting growth of 2.9% and 1.9% from the respective tallies 60 days ago. Further, bottom-line estimates represent year-over-year growth of 28.7% for 2018 and 25.3% for 2019.

Flowserve Corporation Price and Consensus

 

Flowserve Corporation Price and Consensus | Flowserve Corporation Quote

Solid Business Opportunities: Flowserve operates in various end-markets — including power generation, chemical, general, and oil & gas. Strengthening demand in these markets is anticipated to be a boon for the company’s top-line growth. It’s worth mentioning here that Flowserve predicts 5-7% revenue growth year over year in 2018, higher than 3-6% mentioned earlier.

As noted by Flowserve, pickup in liquefied natural gas-related activities in North America, expanding pre-FEED and FEED pipeline, and growing demand for maintenance and upgrade activities at refineries will benefit its operations in the oil & gas market. Further, improving demand and spurring investments in ethylene, and derivative facilities will support business in the chemical market while the growing thermal solar market will strengthen operations in the power market. In general industries, the company anticipates gaining from higher distribution activities, fueled by growing global economy.

Currently, the Zacks Consensus Estimate for the company’s revenues is pegged at approximately $3.9 billion for 2018 and $4.1 billion for 2019. Estimates for 2019 represents year-over-year growth of 4.6%.

Long-Term Prospects: Flowserve’s multi-year program, Flowserve 2.0, is anticipated to drive significant long-term value for its shareholders. Moreover, the program will enable the company to create a better workplace for its employees and effectively support its customers. Further, it intends on combining the operations of its Industrial Product Division and Engineered Product Division under one head, Flowserve Pumps Division. The new division will help the company better control its operations and serve its customers in the global pumps market.

For four years from 2019 to 2022, Flowserve anticipates revenue growth of roughly 200 basis points, above the industry’s growth rate. Operating margin is predicted to be 15-17% in 2022 and free cash flow is likely to be more than 100% of net income.

Factors Working Against Flowserve

Share Price Performances and Poor Valuation: Market sentiments have been against Flowserve for quite some time now. Its stock price has decreased roughly 26.9% in the past three months compared with the industry’s decline of 13%. The stock also underperformed the S&P 500’s decline of 11.2%.

The company’s stock appears overvalued compared with the industry. On a Price/Earnings (P/E) basis, the stock is currently trading at 26.4x, higher compared with the industry’s 18.2x. Further, the stock’s current valuation multiple is above the industry’s highest levels of 20.4x for the past three months.

High Realignment Expenses, Divestiture Issues: Through transformational realignment program, Flowserve intends on reducing backlog, improving on-time delivery, leveraging supplier relationships and enhancing sales process. However, these benefits will be realized in the long run. Currently, the company is dealing with expenses related to the realignment program, amounting to roughly $43.3 million in the first nine months of 2018. We believe that these expenses weigh on profitability. In addition, the company predicts that asset divestment will result in an adverse 1% impact on sales in 2018.

Long-Term Debt: Flowserve’s long-term debts in the last five years (2013-2017) increased 5.9% (CAGR). Though the debt of $1,437 million at the end of the third quarter of 2018 reflects 1.3% decline from the previous quarter, we believe that further issuances are bound to increase the balance. The company’s total debt/total equity stood at 92.2% at the end of the third quarter.

If unchecked, high-debt levels can prove detrimental to the company’s margins and profitability in the quarters ahead.

Stocks to Consider

Some better-ranked stocks in the industry are DXP Enterprises, Inc. DXPE, Barnes Group, Inc. B and Colfax Corporation CFX. While DXP Enterprises currently sports a Zacks Rank #1 (Strong Buy), both Barnes and Colfax carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

For 2019, earnings estimates for the three companies have improved over the past 60 days. Further, positive earnings surprise for the last four quarters was 112.62% for DXP Enterprises, 7.04% for Barnes and 8.88% for Colfax.

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