Flowserve's Stock May Not Have Bottomed, Analyst Drops Rating To Sell

Despite its positive view on multi-industry companies, Goldman Sachs downgraded Flowserve Corp FLS, citing free cash flow concerns and aggressive Street expectations.

The Analyst

Goldman Sachs analyst Joe Ritchie downgraded shares from Neutral to Sell, with a price target of $37, suggesting 12 percent downside.

The Thesis

There could be further downside for Flowserve stock from current levels despite its 11 percent drop for the year-to-date period, Ritchie said in a note. This, according to the analyst, is due to Street expectations being too aggressive.

The analyst clarified that his 2018 and 2019 earnings per share estimates are about 9 percent and 10 percent, respectively, below the consensus estimates for these two periods.

Flowserve is stuck in the bottom quartile across several metrics and the path to recovery is likely to take longer than what the market expects, Goldman said. This is despite the promise offered by the new management's comments on looking for potential additional cost-outs, working capital reduction and free cash flow improvement, the firm added.

"We would be more positive on the shares if oil prices rose and greenfield project activity accelerated, management raised its cost-out program, and/or FLS improved its working capital performance/FCF conversion," Goldman concluded.

The Price Action

Flowserve shares closed down 1.2 percent to $42.13. For the year-to-date period, the stock is down about 12 percent.

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