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Here's Why You Should Avoid Betting on Flowserve (FLS) Stock

Zacks.com logo Zacks.com 3/31/2021

Flowserve Corporation FLS has failed to impress investors with its recent operational performance, owing to difficult end-market conditions and other woes, which are expected to adversely impact its earnings.

The Zacks Rank #4 (Sell) company has a market capitalization of $5.1 billion. In the past six months, it has gained 46.9% compared with the industry’s growth of 120.9%.

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Let’s delve into the factors that might continue to take a toll on the firm.

Weak End Markets: Flowserve has been experiencing weakness in both aftermarket and original equipment businesses. Lower bookings across general industries and oil & gas end markets owing to persistent challenges across its distribution channel and decline in project awards remain concerning for the company’s top-line performance. For the quarters ahead, it remains wary about the coronavirus outbreak-related woes, which might continue to adversely impact its performance. Notably, it expects revenues to decline 4-7% on a year-over-year basis in 2021.

High Debt Level: The company’s high-debt profile poses a concern. Its long-term debt was $1,717.9 million at the end of the fourth quarter of 2020, reflecting 1% increase sequentially. Also, interest expenses in the quarter increased 29.2% year over year to $16.8 million. We find the company more leveraged than the industry, as its long-term debt-to-capital is 49.4%, higher than the industry’s 42.9%. Further, an increase in debt levels can raise the company’s financial obligations.

Forex Woes: Given its widespread presence in international markets, Flowserve is exposed to unfavorable foreign currency movements. Fluctuations in foreign exchange rates might affect its top line in the quarters ahead.

Estimate Trend: In the past 60 days, analysts have increasingly become bearish on Flowserve, as evident from negative earnings estimate revisions. Notably, the Zacks Consensus Estimate for its 2021 earnings has trended down from $1.73 to $1.55 on six downward estimate revisions against none upward revision. In addition, over the same timeframe, the consensus estimate for 2022 earnings has trended down from $1.96 to $1.93 on four downward estimate revisions against one upward revision.

Key Picks

Some better-ranked stocks from the same space are Applied Industrial Technologies, Inc. AIT, The Middleby Corporation MIDD and Kadant Inc KAI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Applied Industrial delivered a positive earnings surprise of 21.92%, on average, in the trailing four quarters.

Middleby delivered a positive earnings surprise of 22.98%, on average, in the trailing four quarters.

Kadant delivered a positive earnings surprise of 30.95%, on average, in the trailing four quarters.

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