Lufkin Industries Inc. (LUFK, Financial) sells and services oilfield pumping units, well automation systems, gas lift and plunger lift systems, progressing cavity pumps, well completion products, foundry castings and power transmission products throughout the world. Lufkin has vertically integrated all vital technologies required to design, manufacture and market its products.
Valuation
LUFK is currently trading at a trailing twelve months P/E of 23.03 and a trailing twelve months EV/EBITDA of 12.32. Current P/E valuations represent a 5% premium over its five year average P/E of 22. LUFK delivered a ROE of 11.7% over the past twelve months and a five year average ROE of 13.7%.
Financial and Business Risks
LUFK has a moderate gross debt-to-equity ratio of 42% and a net gearing of 35%.
No single customer represented over 10% of LUFK sales in 2011.
The rod lift market is a global duopoly between LUFK and Weatherford (WFT, Financial). LUFK's products are priced at a premium compared with that of WFT, as a result of perception of higher quality and better reliability.
LUFK is dependent on the level of oil and gas drilling activity in North America and worldwide, which in turn depends on the level of capital spending by major, independent and state-owned exploration and production companies. Capital spending is driven by current prices and future price expectations for oil and gas.
LUFK does not enter into long-term contracts for raw materials because of the many configurations of its products and sizes of raw material used. In 2011, it experienced periodic shortages of castings as new third-party suppliers were not able to increase production at the rate required.
Business Quality and Capital Allocation
LUFK is a leading supplier to the oil and gas industry of beam pumping units for rod lift applications. Approximately 76% of North American operators have used LUFK's products in their operations. According to Spears & Associates, rod lift sales represented 29% of the total artificial lift market in 2011 and are expected to have a higher growth rate than the oilfield services and equipment market as a whole. Out of 94% of the world’s1 million producing oil wells are assisted by some form of artificial lift. In 2011, LUFK is ranked second in the artificial lift market, excluding electrical submersible pumping systems.
On Feb. 27, 2012, LUFK announced that it had entered into a definitive agreement to acquire Zenith for $127 million in cash, net of acquired cash. Zenith, based in Scotland, is a leading provider of down-hole monitoring, data gathering and control systems for artificial lift applications, including real-time optimization and control systems and artificial lift completion systems.The Zenith acquisition brings downhole sensor technology and electrical submersible pumping systems segment exposure.
LUFK has a long history of revenue and margin growth. LUFK achieved a 20 year revenue CAGR of 9.1% and a five year revenue CAGR of 16.8%. From 1992 through 2004, its gross margins were consistently below 10%. In contrast, LUFK now delivers gross margins greater than 25% consistently. Margins are expected to continue on an upward trend, with improved execution, faster and more accurate new machine tools, and the positive price revisions for new contracts.
LUFK has paid dividends every single year since 1990 and sports a current dividend yield of 0.91% with a corresponding dividend payout ratio of 21%. Dividends are paid quarterly.
Conclusion
The current stock price has factored in the positive expectations and growth prospects for LUFK.
Disclosure
The author does not have a position in any of the stocks mentioned.
Valuation
LUFK is currently trading at a trailing twelve months P/E of 23.03 and a trailing twelve months EV/EBITDA of 12.32. Current P/E valuations represent a 5% premium over its five year average P/E of 22. LUFK delivered a ROE of 11.7% over the past twelve months and a five year average ROE of 13.7%.
Financial and Business Risks
LUFK has a moderate gross debt-to-equity ratio of 42% and a net gearing of 35%.
No single customer represented over 10% of LUFK sales in 2011.
The rod lift market is a global duopoly between LUFK and Weatherford (WFT, Financial). LUFK's products are priced at a premium compared with that of WFT, as a result of perception of higher quality and better reliability.
LUFK is dependent on the level of oil and gas drilling activity in North America and worldwide, which in turn depends on the level of capital spending by major, independent and state-owned exploration and production companies. Capital spending is driven by current prices and future price expectations for oil and gas.
LUFK does not enter into long-term contracts for raw materials because of the many configurations of its products and sizes of raw material used. In 2011, it experienced periodic shortages of castings as new third-party suppliers were not able to increase production at the rate required.
Business Quality and Capital Allocation
LUFK is a leading supplier to the oil and gas industry of beam pumping units for rod lift applications. Approximately 76% of North American operators have used LUFK's products in their operations. According to Spears & Associates, rod lift sales represented 29% of the total artificial lift market in 2011 and are expected to have a higher growth rate than the oilfield services and equipment market as a whole. Out of 94% of the world’s1 million producing oil wells are assisted by some form of artificial lift. In 2011, LUFK is ranked second in the artificial lift market, excluding electrical submersible pumping systems.
On Feb. 27, 2012, LUFK announced that it had entered into a definitive agreement to acquire Zenith for $127 million in cash, net of acquired cash. Zenith, based in Scotland, is a leading provider of down-hole monitoring, data gathering and control systems for artificial lift applications, including real-time optimization and control systems and artificial lift completion systems.The Zenith acquisition brings downhole sensor technology and electrical submersible pumping systems segment exposure.
LUFK has a long history of revenue and margin growth. LUFK achieved a 20 year revenue CAGR of 9.1% and a five year revenue CAGR of 16.8%. From 1992 through 2004, its gross margins were consistently below 10%. In contrast, LUFK now delivers gross margins greater than 25% consistently. Margins are expected to continue on an upward trend, with improved execution, faster and more accurate new machine tools, and the positive price revisions for new contracts.
LUFK has paid dividends every single year since 1990 and sports a current dividend yield of 0.91% with a corresponding dividend payout ratio of 21%. Dividends are paid quarterly.
Conclusion
The current stock price has factored in the positive expectations and growth prospects for LUFK.
Disclosure
The author does not have a position in any of the stocks mentioned.
