Flowserve Corporation’s (FLS – Free Report) recent operational performance failed to impress investors due to tough end-market conditions and other challenges, which are likely to hurt its earnings in the near term.
Image Source: Zacks Investment Research
The currently Zacks Rank #5 (Strong Sell) player has a market capitalization of 4.1 billion. In the past three months, the stock has lost 3.5% compared with the industry’s decline of 1.6%.
Let’s discuss the factors that might continue taking a toll on the firm.
Weak End-Market Conditions: Persistent softness in Flowserve’s original equipment end market adversely impacted its sales in first-quarter 2022. The aftermarket sales in the quarter were down 2.8% year over year, while the original equipment sales declined 5.8%. In the quarters ahead, logistics problems and labor issues will likely affect FLS’ revenues.
Escalated Debt Burden: FLS’ profitability can be hurt by a highly leveraged balance sheet. Flowserve’s long-term debt remained high at $1,251.6 million, while exiting the first quarter of 2022. FLS’ cash and cash equivalents of $575.8 million seem unimpressive considering its heavy debt load. FLS anticipates interest expenses of $45-$50 million for 2022. Fresh issuances of debt instruments in the quarters ahead might increase its financial obligations and hurt profitability.
High Tax Rate: Expensive adjusted tax rates remain a concern for Flowserve. It predicts a 20-22% rate for 2022. The rate suggests an increase from 16.6% recorded in 2021. This might dent its earnings in the year.
Unfavorable Forex: Flowserve is exposed to adverse foreign currency movements, given its widespread presence in the international markets. For instance, in first-quarter 2022, FLS’ sales in the Asia Pacific, Middle East & Africa and Europe decreased 16.7%, 15.5% and 12%, respectively. A stronger U.S. dollar might dampen FLS’ overseas business results in the quarters ahead.
Southbound Estimate Trend: In the past 60 days, the Zacks Consensus Estimate for FLS second-quarter 2022 earnings has declined from 43 cents to 26 cents on four downward estimate revisions against none upward. Over the same time frame, the consensus estimate for 2022 earnings has decreased from $1.77 to $1.51 on six downward estimate revisions against none upward.
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