The growing interest in natural gas as a cheaper and cleaner fuel source has created a large increase in fracturing, although there is a lot of controversy surrounding fracturing and its environmental safety. On the other hand, CARBO Ceramics Inc. (NYSE:CRR) does provide a profitable containment business that we feel enhances their appeal. After being significantly overvalued throughout most of 2011, we believe the current correction in the stock price may represent an attractive time to invest in this high-quality and timely business.
This article looks at CARBO Ceramics Inc., a Dividend Contender, through the lens of the F.A.S.T. Graphs™ Fundamentals Analyzer Software Tool. Since a picture is worth a thousand words, the reader will be provided the “essential fundamentals at a glance” expressed vividly in pictures. In order to provide you the opportunity to research this company deeper and faster we are providing a link to a live, fully functioning earnings and price correlated set of graphs found here. (Tip: Run your mouse over the various lines and watch the graphs come to life).
A Dividend Contender is defined as a company that has increased its dividend for a minimum of 10 to 24 straight years. CARBO Ceramics Inc. is a Dividend Contender that has raised its dividend every year for 11 consecutive years. The complete Dividend Contenders list is compiled courtesy of David Fish. (Open as an excel spreadsheet and look at the tabs on the bottom to find the Dividend Contender list.)
About CARBO Ceramics Inc.: from their website
“CARBO is the world's largest supplier of ceramic proppant for fracturing oil and gas wells; provider of the world's most popular fracture simulation software; and a provider of fracture design and consulting services. The company also provides a broad range of technologies for spill prevention, containment and countermeasures, along with geotechnical monitoring.”
CARBO Ceramics Inc: A Dividend Contender with 11 Consecutive Years of Dividend Increases
Learning from the Past – Looking at Earnings Only
Since dividends are paid out of earnings, a clear perspective of a company’s historical earnings growth record is a vital component of a dividend investor’s prudent due diligence process. The following graph plots CARBO Ceramics Inc.’s earnings per share since 1998. A quick glance to the right of the graph shows that CARBO Ceramics Inc. has increased earnings at a compounded rate of 13.1%(see purple circle on graph)per annum.
Earnings Determine Market Price and Dividend Income: The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings to both price movement and dividend income. The earnings growth rate line or True Worth ™ line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.
Since dividends are paid out of earnings, and therefore represent additional return on top of what the market capitalizes earnings at, they are depicted by the light blue shaded area and stacked on top of the earnings line. Therefore, a quick visual of these two important components is simultaneously revealed:
1. The additional return that dividend paying stocks provide.
2. The percentage of earnings paid to shareholders as dividends (payout ratio).
The value in this article is through carefully analyzing the earnings and price correlated fundamentally based graphs. Notice that one glance tells you how well the company has performed on an operating basis historically and how the market valued that historical performance. Therefore, the reader is free to discover whether or not current valuations make sense based on historical norms coupled with fundamental values. Instead of opinion, this article is designed to produce facts that can be analyzed to the readers investing benefit.
Performance Table: Capital Appreciation and Dividend Income CARBO Ceramics Inc
The associated performance results with the earnings and price correlated graph, validates the above discussion regarding the two components of total return: capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.
When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 10.4% capital appreciation (Closing Annualized ROR), long-term shareholders of CARBO Ceramics Inc. would have received an additional $27,643.26 in dividends that increased their total return from 10.4% to 10.9% per annum.
(Note: Since this is a Dividend Contender it has raised its dividend every year for at least 10 to 24 years, therefore, negative dividend growth rates shown, if any, will be attributed to special additional dividends paid in excess of the company’s regularly reported dividend rate.)
The following graph plots the historically normal PE ratio (the dark blue line) correlated with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as low as it has been since 1998.
A further indication of valuation can be seen by examining a company's current price to sales ratio relative to its historical price to sales ratio. The current price to sales ratio for CARBO Ceramics Inc is 3.26, which is historically low.
Looking to the Future
Extensive research has provided a preponderance of conclusive evidence that future long-term returns, and the dividend and its growth rate are a function of two critical determinants:
1. The rate of change (growth rate) of the company's earnings
2. The price or valuation you pay to buy those earnings
Therefore, forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance.
Therefore, it logically follows that measuring performance without simultaneously measuring valuation is a job half done. At its current price, which is attractively aligned with its True Worth™ valuation, CARBO Ceramics Inc represents a potential opportunity to invest in a Dividend Contender at a reasonable price. The important factor is that CARBO Ceramics Inc. has real assets and cash flow underpinning its stock price. This solid economic foundation offers shareholders the potential for both a strong margin of safety and an opportunity for an increasing dividend income stream and potentially attractive future returns.
The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.
The consensus of 8 leading analysts reporting to Capital IQ forecast CARBO Ceramics Inc long-term earnings growth at 35.2%. CARBO Ceramics Inc has 0% debt. CARBO Ceramics Inc. is currently trading at a P/E of 15, which is outside the value corridor (defined by the five orange lines) of a maximum P/E of 42.2. If the earnings materialize as forecast, CARBO Ceramics Inc.’s True Worth valuation would be $992.05 at the end of 2017, which would be a 53.2% annual rate of return from the current price, including assumed dividends.
Earnings Yield Estimates
Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price and dividend income in the long run, we expect the future earnings of a company to justify the price we pay.
Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in CARBO Ceramics Inc. to an equal investment in 10-year Treasury bonds illustrates that CARBO Ceramics Inc.’s expected earnings would be 20 times that of the 10-Year T-Bond Interest. (See EYE chart below.) This is the essence of the importance of proper valuation as a critical investing component.
This report presents essential "fundamentals at a glance" on Dividend Contenders CARBO Ceramics Inc, illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although with just a quick glance you can know a lot about the company, it's imperative that the reader conduct his or her own due diligence in order to validate whether the consensus estimates seem reasonable or not. Follow the link we provided at the beginning of this article to a fully functioning F.A.S.T. Graphs™ on CARBO Ceramics Inc.
Summary & Conclusions
CARBO Ceramics Inc is expected to grow at a very strong rate over the next three to five years. After its price being so far ahead of itself, recent controversy surrounding fracturing has brought their valuations back to sane levels. Consequently, we believe that the stock looks very attractively valued at today’s prices. Therefore, investors seeking significant above-average growth with a moderate yield that could grow at above-average rates might want to consider looking more closely at this exciting fast-growing mid-cap company. However, a comprehensive due diligence effort is highly recommended.
Disclosure: Long CRR at the time of writing.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
About the author:
F.A.S.T. is an acronym for Fundamentals Analyzer Software Tool that takes all the hours of manual graphing of business fundamentals and reduces it to seconds, giving you critical information in an instant. With one glance you know a lot about the business you are graphing and its past, present and future value. F.A.S.T. Graphs™ should be the first step in every research project. Each graph is worth 1,000 words in describing a company's growth, consistency and valuation.