The Rising Influence of Rising Affluence

[DewDiligence]

Morningstar not concerned re CLB’s twice-lowered guidance:

http://news.morningstar.com/articlenet/article.aspx

Core Laboratories (CLB) hit a rough patch after two successive cuts to management's revenue outlook within three weeks. The effect on the share price has been severe: The stock is now down more than 25% from its all-time high in April. In total, $2.7 billion in value has been wiped out, even though earnings will still grow at least 9% and free cash flow will increase 10% this year, under the lower revenue estimate. We think the market's reaction misjudges the impact of management's guidance goof and dismisses Core's extremely wide economic moat, which drives industry-leading margins and returns on invested capital.

…After discussion with management, we believe 80%-85% of Core's reservoir description comes from international oil fields, and we estimate that the affected revenue streams from U.S. unconventional and the Gulf of Mexico actually make up only about 10% of Core's revenue, or about $100 million-$110 million. [I.e. softness in CLB’s US business won’t be as consequential to the bottom-line results as some investors probably think.]

Core's workforce is stable… Attrition of the firm's scientist workforce is in the low single digits because employees like working for Core. Management has indicated that when staff does leave, it is generally for a position with one of the international oil companies. What they often find is that the nature of projects is much less diverse. Management believes that the variety of projects in which Core is engaged helps prevent burnout and retain staff.

Morningstar’s valuation model for CLB assumes 7% or higher revenue growth for the next 10 years (excluding 2014, where the model uses CLB’s own guidance of 4% revenue growth).