On April 24th, a steep and somewhat unexpected drop on stock value for Core Laboratories (NYSE:CLB) opened a window of opportunity. The occasion materializes after face value lost a little over 9%, following announced results for the first quarter of 2014. Timing is the key to this possible investment, because of developed and growing market synergies. In other words, the recent incidents in the oil & gas industry have caught the attention of the wider public and government representatives. Specifically, the Deepwater Horizon and others in Michigan have elicited protests and tighter control by regulators in the US. Besides the negative impact over the industry, the equipment and services segment of the oil & gas industry found itself in the middle of favorable conditions.
A successful and simple business model
In order to find the root for the recent drop, previous performance for Core Laboratories will be looked upon. For fiscal year 2013, the company reported four consecutive quarters of all-time high for earnings per diluted share, net income, operating income, and revenue. At the same time, stock price appreciation rate reached 74% during the same period. Successful performance was replicated across the Atlantic on the NYSE Euronext Exchange in Amsterdam, where European ownership climbed from 12% to 20%. Results achieved through three simple guiding rules: maximize free cash through fiscal discipline, maximize return on invested capital, and return excess capital to shareholders.
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- CLB 15-Year Financial Data
- The intrinsic value of CLB
- Peter Lynch Chart of CLB
Besides the successful track of the business model, analysts warned about some performance difficulties for Core Laboratories. Two financial institutions during the first quarter of 2014 downgraded the stock: Guggenheim and S&P Equity Research. And Barclays had lowered target price at the end of 2013 as a premonition of what was to come. More telling is Zacks’ reporting on the stock, because it sustain a “Neutral” rating while posting a target price below all other financial institutions. Additionally, the closing price on April 24th slipped under Zacks’ estimate.
The recent stock drop followed announcements concerning first quarter performance reports. Core Laboratories reported improved financial indicators, but failed to meet analyst expectations, and the market responded in kind. Earnings per share and revenues have fallen short, even when showing improvements on a year-over-year basis. Worth mentioning, this has been the firm’s most profitable first quarter in its history.
Take the chance if you have the cash?
Currently trading at 36.8 times its trailing earnings, Core Laboratories carries a 44% premium to the industry average. And it pays a quarterly dividend of $0.50, representing an annual yield of 0.78%. Yes, the company holds one of the highest return on invested capital and equity, but debt-to-cash ratio in one of the worst among its peers. Nonetheless, operating margin continues to improve for the company and has exceeded the 30% mark for the second year in a row.
The greatest risk to Core Laboratories at this point is the rising and unaddressed debt. Since performance depends on the introduction of new products, letting debt levels increase while returning cash to shareholders, has the potential to curtail research and development. Most important, the company’s model does not focused on developing new technology, while achieving growth through acquisitions. Additional risks derive from current exploration and spending patterns, costs, geo-political risks, competition and the advent of new technologies.
In the end, the favorable market environment has played in favor of the company as long as acquisitions delivered on expectations. When those expectations were missed, the market punished the company for founding operations on a high-risk model. Most important, the company has made no significant product introductions to assure long-term growth. Gurus new of this and began dropping the stock along 2013, especially those with large positions.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.