The Rising Influence of Rising Affluence

[DewDiligence]

FBR upgrades CLB—sets $150 price target:

http://online.barrons.com/article/SB50001424052748703892404578275821798376596.html

We are upgrading Core Laboratories to Outperform from Market Perform on the heels of a very strong fourth-quarter earnings report complemented by an equally impressive outlook.

In a nutshell, management continues its track record of positioning the company to benefit from emerging secular trends before such trends become broadly appreciated by investors. This is manifested in a number of ways, ranging from designing new ways of flooding oil fields to positioning the company early in certain markets based on its geological insight.

The bear case on Core Laboratories has been that the company would be hard pressed to show the same level of growth that it has experienced over the past several years as North American shales continue to transition out of the exploration phase into the development phase. However: 1) we believe new liquids plays will continue to emerge in the U.S.; and 2) ultimately, unlike some existing dry gas plays, the science on how to optimize production from these emerging plays is far from settled, yielding copious opportunities for Core Laboratories to continue its stellar growth trend.

A key part of this thesis is the development of international unconventional resources, which should provide continued growth as North American plays start to mature over the next several years. [I’m surprised at this insofar as it doesn’t seem to jibe with what CLB itself has said on its investor presentations.] We were not surprised by management's expectation for activity outside of North America to rise at a clip of 7% this year [but this number is for all int’l, not just unconventional]. New discoveries in emerging geomarkets, such as Sub-Saharan Africa and South America, have significant potential to drive the reservoir-description segment higher in particular.

Management guided to a 2013 earnings per share in the range from $4.96 to $5.22 [non-GAAP], with the midpoint higher than the current mean consensus EPS estimate of $4.98. Given a history of conservative forecasting by the company, we believe that such long-term guidance would not have been provided without a large degree of certainty in the company's ability to exceed those numbers.

We are raising our price target to $150 from $110; this is based on a 25 times 2014 price/earnings multiple, above the current multiple of 23 times, which we believe is appropriate given that we believe the company has returned to its historical beat-and-raise pattern.

We are increasing our 2013 EPS estimate to $5.15 from $4.90. We are also introducing a 2014 EPS estimate of $6.05.

I like CLB, but I’m not as bullish as FBR is. Comments?