Wall Street doesn't always seem to make sense -- as investors in industrial flow management equipment maker Flowserve (NYSE:FLS) learned Thursday after their company reported earnings that, by all accounts, beat analyst estimates pretty soundly. Whether calculated according to GAAP accounting standards, or the more lenient "adjusted earnings" variety that's become more popular on Wall Street, Flowserve's Q3 earnings of $0.36 (GAAP) and $0.37 (adjusted) easily topped Wall Street's predicted $0.34 in per-share profits for the quarter.
Nonetheless, Flowserve stock closed the day down 11% on the news. Why?
Earnings clearly weren't the problem last quarter -- nor were revenues. In fact, Flowserve reported collecting revenues of $883.4 million in Q3, nearly $20 million more than Wall Street's expected $865.3 million.
Rather, the problem with Flowserve was not so much what it actually earned, as it was how much the company promised to earn by year-end. Management told Wall Street to expect earnings of between $1.05 and $1.15 per share for the full year. Problem is, Wall Street had already told investors to expect earnings of $1.39 per share. This gap, verging on a chasm between Wall Street's expectations and what Flowserve feels comfortable promising to deliver, explains why Flowserve shares are circling the drain today.
Is that fair? Investors who are lamenting the fact that their stock was not rewarded for "beating earnings" may not think so. But when you consider that Flowserve stock sells for more than 37 times the low end of its latest earnings guidance for this year -- even after its sell-off -- maybe a bit of a pullback in share price really was in order. In fact, I wouldn't be too terribly surprised to see Flowserve stock go down even more.