After the close last night, industrial company Flowserve
(FLS 46.10, -1.65, -3.46%) reported mixed 4Q18 results and provided downside guidance for FY19.
Specifically, it posted EPS of $0.58, in-line with consensus expectations, while
revenues declined by 4.6% to $987 mln, missing the $1.06 bln expectation. Looking
forward, Flowserve sees FY19 EPS of $1.95-$2.15 vs. the $2.16 consensus, and
revenue growth of 4-6%, equating to about $3.99-$4.06 bln vs. expectations for
As a result, the stock began today's session sharply lower, moving down as much as 7.6%, taking shares below their 100- and 200-day moving averages. However, as the morning progressed, buyers stepped in looking to take advantage of the sell-off and consequently helped FLS well off of its early morning lows. On that note, while the Q4 headline numbers and the company’s outlook weren't spectacular, business at FLS isn't falling off a cliff either. Furthermore, the company is making good progress in its supply chain transformation -- called Flowserve 2.0 -- which it expects to drive additional margin improvement in the quarters ahead.
Global Economic Gauge
FLS isn't the most recognizable name, but by virtue of the nature of its operations and its customers, the company’s financial results and performance do offer a good glimpse into the general health of the global economy. The company sells flow control equipment (pumps, valves, seals, etc.) into a variety of leading industries representing geographically diversified positions. More specifically, the oil and gas sector account for 38% of revenues at FLS while general industries (pulp/paper, pharma, food and beverage) represents 24%, chemical provides 21%, and power generation forms the smallest vertical at 13%.
Geographically, North America is the company’s largest market, contributing 40% of revenue, with Europe next at 23% and Asia Pacific accounting for 19% of revenue.
The company’s results today follow a very solid 3Q18 in which it exceeded analysts' top and bottom line estimates; EPS and revenue grew by 32% and 8%, respectively. Interestingly, it was Europe (+27%) and APAC (+26%) that led the way in terms of growth then while North America lagged at +4%. Additionally, bookings, a key metric for the company given that it measures current demand, jumped by 13%, driven by strong OEM and aftermarket business.
During the earnings call, management was clearly bullish too, commenting that its end markets continue to strengthen and that it remains encouraged by the visibility it has into large project opportunities. FLS said it expected these opportunities to come to fruition this year and in 2020.
But business conditions unexpectedly softened on FLS in the fourth quarter as revenue came up well short of expectations and as bookings growth decelerated to 6.1%. In its earnings press release, management cited market uncertainties such as geopolitical headwinds, tariffs, sanctions, and other regional challenges. Judging by its downside guidance for FY19, the company is anticipating that these headwinds will persist for the time being.
The company’s earning call, scheduled for mid-morning, should deliver a better feel for management's outlook for 2019.
Floserve 2.0 Driving Gross Margin Expansion
On the positive side, FLS' margins continue to improve, thanks to its "Flowserve 2.0" transformation in which the company is examining its supply chain operations, looking for ways to cut costs and improve efficiency. This process includes reviewing the sourcing and purchasing of raw materials, parts, and equipment; enabling the manufacturing operations process of castings and forgings; and monitoring the assembly and delivery of products.
Flowserve’s CEO explains the initiative this way: "We will align people, processes and technology with our key suppliers to create value in a flexible, strategic supply chain. To achieve this, we are going to deploy tools and systems to enable the supply chain data and then drive the accuracy and analytics — with an overarching mindset of continuous improvement and the ruthless elimination of manual process.”
So far, these efforts have paid off. Last quarter, adjusted gross margin improved to 33.2%, up 130 basis points, reaching the highest level in nearly two years. In Q4, gross margin expanded again to 33.7%, up by a significant 300 basis points. What's especially encouraging is that the company is only several months into this three-year process.
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