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Dresser-Rand Group - A Backdoor Play on Oil and Gas

May 01, 2009 | About:
Dresser-Rand [NYSE:DRC] May 1, 2009 $25.20 (2:45 PM EST)

52-week range: $11.70 (Nov. 21, 2008) - $42.41 (June 6, 2008)

Dresser-Rand is among the largest suppliers of rotating equipment solutions to the worldwide oil, gas, petrochemical, and process industries. The Company operates manufacturing facilities in the United States, France, United Kingdom, Germany, Norway, India, and China, and maintains a network of 33 service and support centers covering more than 140 countries. DRC was created on December 31, 1986 and came public in August of 2005.

DRC reported March quarter results this Wednesday and posted excellent numbers. EPS were $0.42 versus $0.32 even though 2008’s quarter included a positive 6 cent a share non-recurring gain. Revenues surged by 39.9% year-over-year.

Despite the drop in oil and gas prices DRC is expected to post full year results of $2.40 /share making their current multiple just over 10.1x this year’s earnings.

Here are their per share numbers as reported by Value Line since their IPO:

Year ….. Sales ….... C/F ….. EPS .….. B/V ….. Avg. P/E

2005 …. 14.14 ….. 1.15 …. 0.56 ….. 6.02 ……..41.3x

2006 …. 17.57 ….. 1.42 …. 0.83 ….. 7.39 ……..27.9x

2007 …. 19.40 ….. 1.82 …. 1.25 ….. 9.38 ……..27.6x

2008 …. 26.78 ….. 3.01 …. 2.36 …..11.65 …….13.4x

Dresser-Rand shares were flying high when energy prices were going through the roof. They touched a high of $44 in 2007 and $42.41 in June 2008. They bottomed with the market last November 21st before rebounding to today’s $25.20 level.

It doesn’t seem far fetched to look for these shares to command at least a 13 multiple again. That would bring DRC back to a $31.20 target before year end.

Here’s a nice buy/write combination play that can generate excellent returns even if DRC shares don’t do anything at all between now and next January.

_________________________Cash Out_______Cash In

Buy 1000 DRC @$25.20________$25,200

Sell 10 Jan. $25 calls @$4.50 _________________$4,500

Sell 10 Jan. $25 puts @$4.30 ____ ____________$4,300

Net Cash Out-of-Pocket ________$16,400


If Dresser-Rand stays above $25 (as it is right now) through the expiration date of January 16, 2010:



Your $25 calls will be exercised.

You will sell your shares for $25,000.

Your $25 puts will expire worthless.

You will have no further option obligations.

You will own no shares and hold $25,000 cash for your original

outlay of $16,400.

That’s a net profit of $8,600 / $16,550 = 52.4 % cash-on-cash.

Not too bad considering the underlying DRC shares did not need to move up at all to achieve this best-case profit. That total return would have occurred in just 8.5 months.

What’s the Risk?

If Dresser-Rand shares go below $25 and remain there on expiration date:

Your $25 calls will expire worthless.

Your $25 puts will be exercised.

You will be forced to buy another 1000 shares of DRC and to

lay out an additional $25,000 cash.

You will end up owning 2000 shares of DRC.

What’s the break-even on the whole trade?

On the original 1000 shares it’s the purchase price of $25.20 less

the $4.50 /share call premium = $20.70 /share.

On the ‘put’ shares it’s the $25 strike price less the $4.30 /share

put premium = $20.70 /share.

Just coincidentally the average break-even price would be identical at $20.70 for each batch of shares.

Thus, DRC shares could drop by up to $4.50 /share or (-17.8%) without causing a loss on the whole trade.

Summary:

If Dresser-Rand shares:

• Go up.

• Stay unchanged.

• Go down to $25.

You will make the maximum profit of 52% in about 8.5 months.



If Dresser-Rand shares decline to below $25:


* You will hold 2000 shares.

* You would still be in profit unless the price declined to less than $20.71.

Barring another major melt-down, I don’t see these shares

hurting you from the $20.70 /share break-even price.


Disclosure: Author is long DRC shares and short DRC options.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.gurufocus.com/peter_lynch.php
http://www.TalkMarkets.com
http://www.MutualFunds.com

Visit Dr. Paul Price's Website


Rating: 5.0/5 (6 votes)

Comments

batbeer2
Batbeer2 premium member - 5 years ago
Doc,

If I'm not mistaken DRC trades at ~10x record earnings

with record margins on

record sales.

If I'm not mistaken, Dresser Rand sold it's compressor business (relatively stable cash flow) to EXH. IMO this makes DRC a pure drilling play. The impressive growth by DRC (and the high p/e noted by yourself) in the last few years coincides with a boom in the drilling industry.

What are your thoughts on the chances of DRC repeating or beating it's performance this year ?

Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
The consensus is for slight growth this year to $2.40 from $2.36.

For 2010 many analysts feel earnings might dip to $2.01 - $2.10 but Value Line just published a $2.50 estimate in their April 24th issue.

Even at $2.05 the P/E on today's price looks pretty moderate. Corporate cash was $160 million as of March 31, 2009 which exceeded all debt due in the next five years.

Zacks put out a special alert yesterday listing DRC as one of three of their current top-rated stocks for near term performance.

I like their prospects but I'm taking the conservative play by writing calls and puts at $25 to lock in good gains even if the shares go up, stay flat or even go slightly lower.
Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
The current issue of BusinessWeek is recommending DRC with a 12-month target price of $35.

The quoted analyst sees 2009 - 2010 earnigns of $2.20 and $2.50 respectively.
Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
Zack's now loves DRC [at $31.68/share] ...

Value Dresser-Rand Group Inc. August 21, 2009

Dresser-Rand Group Inc. (DRC) recently posted second-quarter earnings of 74 cents per share, outpacing the year-prior 55 cents and exceeding the Zacks Consensus Estimate by 28%.

Company Description

Dresser-Rand Group manufactures centrifugal and reciprocating compressors, steam and gas turbines, expanders, portable ventilators and control systems at facilities in the United States, France, United Kingdom, Germany, Norway, India and China for the oil and petrochemical industries around the world. The company can trace its roots back to 1840.

Strong Second Quarter Results

The company recently posted second-quarter earnings of 74 cents per share, outpacing the year-prior 55 cents and exceeding the Zacks Consensus Estimate by 28%. Total revenues of $606.1 million came in 12% ahead of the year-prior result.

Vincent R. Volpe Jr., President and Chief Executive Officer, called it a solid quarter with strong top line and bottom line growth, adding that there was improvement in the new units segment with bookings up sequentially from $109 million in the first quarter 2009 to $169 million in the second quarter. “While there is still a ways to go before we get back to 2008 bookings levels, we continue to see a steady flow of inquiries and expect our full year guidance of $700 million to $1.1 billion will be met,” said Volpe.

Bullish Forecasts

Analysts polled by Zacks are upbeat on earnings. The full-year Zacks Consensus Estimate of $2.51 per share was increased from last month’s $2.42.

For 2010, analysts polled by Zacks are projecting earnings of $2.18 per share, versus last month’s $2.15.

Value Fundamentals

Dresser-Rand Group is a Zacks #1 Rank (strong buy) stock. It is trading with a forward P/E of 12. It has a price-to-book of 2.9. The company also has an outstanding return on equity (ROE) of 27.6%, more than doubling the industry average of $12.5.

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