Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
APRIL 20, 2011/ RBC Core Laboratories (NYSE: CLB) Outperform Average Risk Conference call review
We rate CLB Outperform due to the company's technology-focused suite of products/services, leading market positions, leverage to oil, and superior returns.
EPS estimates. Increasing our 2011 estimate to $3.67 from $3.61 to account for 1Q upside ($0.03/share) and lower non-cash interest expense related to the company's convertible notes. For 2012, our new estimate of $4.76, up from $4.71, is driven by 18% revenue growth and an incremental margin of 42%. [again, more bullish than Pickering]
Raising price target to $110, or 23x our new 2012 EPS estimate. Target multiple is slightly above the high end of the company’s five-year historical band of 15-22x, which we believe is appropriate given its positioning and leverage to an expected acceleration in international activity later this year and in 2012.
Guidance for 2011 unchanged. CLB maintained full-year guideposts of $890-910mn revenue, ~30% operating margin, and $3.55-3.60 EPS - a slight positive, in our view, given 1Q11 downside relative to its original expectations. In addition, as our estimate suggests, we believe the EPS range will prove conservative.
International set to accelerate in 2H11. Inquiry levels are giving CLB confidence that activity will ramp up as the year progresses. Areas of relative strength include the Middle East, South America, and Asia Pacific. Unrest in North Africa and the Middle East has had a very minor impact on results to-date, and on the conference call CLB said that if conditions do not deteriorate there could be upside to its forecasts.
U.S. should rebound from the weather-impacted 1Q, specifically the revenue/margin declines in Production Enhancement. On the call, the company noted continued market penetration for its new HTD Blast with the system on 19% of all horizontal oil shale wells in the U.S. in 1Q11 (17% in 4Q10). Deepwater GOM should also be a positive going forward with CLB saying that it expects to begin working on projects in late 2Q11 (since Macondo, the GOM has been costing quarterly results ~$0.02-0.03/share).
Valuation and Price Target CLB is currently trading at 21.2x consensus EPS for 2012 (20.2x our new estimate). Since 2006, shares have traded at an average out- year multiple of 18.4x with a one standard deviation band of 15x to 22x. Our price target multiple of 23x is above this range, which we believe is appropriate given the company’s positioning and leverage to an acceleration in international activity that we expect to occur later this year and in 2012. In addition, the target multiple is more in line with the range that has been established since mid- 2009, or 18-25x (see LHS chart below), which we believe has been helped by the mid-cap void left following the acquisitions of Smith International and BJ Services.
Valuation Our 12-month price target is $110, or ~23x our 2012 EPS estimate. Target multiple is slightly above the high end of its five-year historical range, which we believe is appropriate given the company's positioning and leverage to an expected acceleration in international activity later this year and in 2012.
Price Target Impediment The major risks to our price target include reduced drilling activity, lower commodity prices, and global oil/natural gas supply/demand imbalances.
Well, unfortunately the chart itself wouldn't copy. Sorry to disappoint, but perhaps it's not all that significant after all. Basically it showed CLB as a clear outlier with an R-squared of ~0.26 vs. an oil beta of ~.54. A number of other stocks in the sector cluster around an R-squared of 0.33 - 0.35 vs. oil betas ranging from 0.6 - 0.8, with a few (NOV, SLB among them) much more highly correlated.
fwiw, here's some excerpts from the report:
Maintain Buy Increasing international spending, an improving business mix from deepwater and oil related activity, and share repurchases all represent potential upside to EPS. We are increasing our 2011/2012 EPS estimates to $3.84/$4.85 from 3.64/$4.60, and our PO to $107 from $106 (implies 22x 2012 EPS). [more bullish than Pickering] While we believe the oil service industry is in an up-cycle, we note that oil prices are approaching levels that history suggests can threaten economic growth. Notably, CLB is a low oil beta stock (see Chart 1).
Conservative 2011 guidance We think the EPS guidance is low given: (1) a conservative US rig count assumption (~1,700 on average for 2011 vs. 1,772 currently and our 1,800 forecast); (2) cautious assumption regarding turmoil in the Middle East and North Africa (activity is approaching normal levels in all countries except Libya); and (3) an assumption of no additional share repurchase (we assume ~$150mn in 2011). Notably, between 2005 and 2008, CLB beat the mid-point of annual guidance by 9-36%. CLB reiterated its 2011 revenue guidance of $890mn-$910mn and EPS guidance of $3.55-$3.60, with operating margins at ~30% and YoY incremental margins over 40%.
Ramp in int’l activity expected in 2H11 Management noted that they are surprised by lack of activity pick-up so far, but are encouraged by increasing inquiry levels. We believe a rapid increase in Middle East activity is imminent, driven by Saudi Aramco and Abu Dhabi (see The Saudi Arabia of catalysts! for details). The March international rig count stands at 1,147 currently vs. a high of 1,108 in September 2008. Critically, the rig count in service- intensive regions has surpassed the last cycle high.
Growth in Production Enhancement even w/ a flat rig count CLB expects Production Enhancement revenue growth in the high teens, even with a flat US rig count, given the service-intensity associated with the Eagle Ford and Bakken. Approximately 2/3rd of Production Enhancement’s revenue is generated in North America, though the company is growing its international presence. We note forgone revenue by not adding another manufacturing shift is lower margin, in line with CLB’s focus on maximizing returns on capital.
CLB could buyback ~5% of it shares in 2011 CLB can buyback approximately $250mn of shares, or ~5% of shares outstanding, in 2011, while maintaining its target debt/capitalization ratio of ~30%. We are modeling ~$150mn of buybacks. Notably, CLB bought back $49.8mn worth of shares in 1Q11 and we believe the pace could accelerate once the exchangeable notes are refinanced.
CLB’s stock has low correlation with oil prices While we believe the oil service industry is in an up-cycle, we note that oil prices are approaching levels that history suggests can threaten economic growth. Interestingly, even with over 60% of its revenue generated internationally and through oily activity [!!?? <g>], CLB stock has one of the lowest correlations with oil prices in the sector (see Chart 1). The chart [not] below shows a regression of the weekly change in share price vs. the weekly change in the near-month Brent futures contract since 2006.
Potential upside to above-guidance estimates Reservoir Description revenue is closely tied to production spending, with growth typically running three hundred basis points in excess of underlying growth in spending. However, 1Q11 segment revenue was negatively impacted by the civil unrest in the Middle East and North Africa. Notably, Libya will continue to impact results in 2Q11. As a result, we are forecasting 16%/14% revenue growth in 2011/2012. We forecast global E&P spending will increase ~15% in 2011. Production Enhancement revenue is closely tied to the global rig count, which we forecast to grow 14% in 2011. CLB expects revenue growth for Production Enhancement in the high teens, even with a flat US rig count. Our model assumes 19%/15% revenue growth in 2011/2012. Reservoir Management revenues tend to be lumpy, with a smoothed growth rate in the mid-teens. With significant sequential growth of ~30% in 1Q11, we are conservatively forecasting revenue growth in 2011/2012 of 17%/20%.
Price objective basis & risk Core Laboratories (CLB) Our $107/share price objective implies a 22x multiple of our 2012 EPS estimate, which is above its historical mean of 18x. With 2012 EPS approaching the 2008 peak, we expect multiples to exceed the high of 24.7x of the 2007-1H08. Risks to our price objective are global economic weakness, slower oil and gas demand growth, reduced upstream capital spending plans and continued downward pressure on prices, changes to fiscal and royalty regimes in countries where CLB operates or might operate, and the potential for geopolitical upheaval (given its global presence).
fwiw, I'm reading it, and waiting for a few more points down before taking an initial position in CLB.
I will try to post some research notes from RBC and Merrill later today -- the latter in particular has an interesting R-squared analysis going back five years on CLB's (lack of) correlation with crude.
another great board -- didn't realize you'd set this one up but you know your stuff in this sector
recently added CLB to the watch list after reading about it somewhere...has been money thus far this year -- should be bullish as long as energy is the hot sector...hoping for a pullback across the energy sector to load up for the run thru next spring.