Flowserve (FLS) Q2 Earnings: What’s in Store for the Stock?

Zacks

Flowserve Corp. FLS is set to report second-quarter 2016 results, after the closing bell on Jul 28.

The Texas-based company’s earnings history is a mixed bag. Flowserve beat the Zacks Consensus Estimate in two of the trailing four quarters, while missing in the other two, with an average negative surprise of 1.1%.

In the last reported quarter, the company delivered a negative earnings surprise of 7.1%.

FLOWSERVE CORP Price and EPS Surprise

FLOWSERVE CORP Price and EPS Surprise | FLOWSERVE CORP Quote

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

Factors to Consider

Flowserve boasts a diversified mix of products, end markets and geographies and sees huge prospects in its investment projects on a global platform. However, the company’s growth has been under pressure in recent times.

Much of Flowserve’s recent lukewarm financial performance is largely attributable to the unfavorable macroeconomic conditions like adverse currency effects, volatility in oil & gas sector, slowdown in global industrial markets and decelerating economic growth in certain emerging markets. Its financials have been hurt by foreign currency translations in recent quarters, and we believe it will put pressure on the results of the quarter-under-review as well.

In addition, Flowserve’s realignment strategies — although beneficial in the long term — will likely weigh on its financials in the quarter under review.

As over two-third of the company’s revenues are sourced internationally, uncertainty in the broader macro environment, including Europe, Asia-Pacific, North America, the Middle East and Latin America, has been exerting persistent pressure on Flowserve’s financials over the past few quarters. These trends will likely continue in the to-be reported quarter as well.

On the other hand, Flowserve’s robust operating culture, called “One Flowserve”, armed with a strong and collaborative management team, is expected to offset some of the aforementioned challenges. In addition, a booming U.S. chemical market business, largely led by ethylene expansion in North America and thriving nuclear energy markets, is expected to support the company’s results.

Also, Flowserve inked a global preferred supplier agreement with environmental management services provider, Veolia Group, earlier this year. This agreement will boost its competitive position in the water resources and related industries, while adding to top line growth. The company also released a much-anticipated forged Equiwedge gate valve design, integrating two industry best practices into one design. The new product will likely boost top line growth for the company.

Moreover, the company’s previously acquired SIHI Group B.V., a manufacturer of pumps for process industries, has fortified Flowserve’s foothold in the chemical pump markets as well as engineering & manufacturing services, and will likely be accretive to its top-line performance for the second quarter.

Earnings Whispers

Our proven model does not conclusively show that Flowserve will 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 #3 (Hold) for this to happen. But that is not the case here as you will see below.

Zacks ESP: Earnings ESP for the stock currently stands at 0.00%. This is because both the Zacks Consensus Estimate and the Most Accurate estimate are pegged at 61 cents.

Zacks Rank: Although Flowserve’s Zacks Rank #3 increases the predictive power of ESP, we also need to have a positive ESP to be confident of an earnings beat.

Note that we caution against stocks with Zacks Rank #4 or #5 (Sell-rated stocks) 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:

B2Gold Corp. BTG has an Earnings ESP of +100.00% and sports a Zacks Rank #1. It is scheduled to report results on Aug 4.

Carrizo Oil & Gas Inc. CRZO has an Earnings ESP of +46.15% and holds a Zacks Rank #2. It is slated to report results on Aug 4.

Galena Biopharma, Inc. GALE has an Earnings ESP of +28.57% and carries a Zacks Rank #2. It is expected to report results onAug 4.

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