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Is Snow Capital Wrong About Carbo Ceramics?

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Jun 19, 2015
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According to GuruFocus Real Time Picks, investor

Richard Snow (Trades, Portfolio), reduced his stake in Carbo Ceramics Inc (CRR) by 10.22%. After this sale, he is still the main holder of CRR with 1,042,263 shares, which is 4.48% of the company’s outstanding shares and 1.35% of his total assets.

Snow has traded in CRR since Q3 2012 and now he holds shares of the company with an average price of $46.04/share with an average loss of 6%.

The news

Recently CRR reported that it deployed two of its new proppant technologies for an E&P operator in the Gulf of Mexico's Lower Tertiary trend, which is expected to increase the operator's return on investment by providing better production and estimated ultimate recovery (EUR).

The company reported a GAAP net loss of $28.6 million, or a loss of $1.24 per share after-tax costs associated with slowing and idling production.

Industry activity witnessed a significant and severe contraction during the first quarter of 2015,

Technology is what separates them from their competitors in a difficult time in the industry. They believe that their “Optimize the Frac” technology businesses, will bring important value to E&P operators to increase well production and estimated ultimate recovery. Also, the technology offers E&P operators lower finding and development (F&D) costs, due to building more efficient fracs that increase production and EUR.

The Investor

Snow Capital Management is a boutique investment manager offering several value strategies available in multiple formats.

Richard Snow (Trades, Portfolio) is the founder of Snow Capital. Snow began his career investing the proceeds from the sale of the Snow family businesses. Their business is based on the belief that attractive returns can be earned by constructing diversified portfolios of well-managed, financially strong companies where the stock price is depressed because the company has experienced short-to intermediate-term difficulties.

The portfolio is composed of 129 stocks and 12 of them are new, bought during the last quarter. The total value of the portfolio is $3,213Mil with 11% Q/Q turnover.

The company

The Company is a supplier of ceramic proppant and provides fracture simulation software, fracture design, engineering and consulting services and a broad range of technologies for spill prevention, containment and countermeasures. The Company sells the majority of its products and services to operators of oil and natural gas wells and to oilfield service companies to help increase the production rates. Its products and services are primarily used in the hydraulic fracturing of natural gas and oil wells.

On April 3, CARBO was named among the Top 25 Upstream Oilfield Equipment Providers by the Houston Business Journal for 2014. 

It has almost null ratios (ROE of 1.11%, ROA of 0.94% and ROC of 2.98%) and they are all having the worst performance when compared to the company’s history. The ratios are ranked lower than 65% of the other companies in the Global Oil & Gas Equipment & Services industry. Financially the company doesn’t have any problem, even so, the ratios have never been so low. Financial strength is rated 7 out of 10 by GuruFocus with a cash to debt of 1.28 (ranked higher than 65% of other companies in the same industry that has an average cash to debt of 0.53), an equity to asset of 0.79 (the industry median is 0.52) and an interest coverage rated as “No Debt”.

The company is trading with a P/E(ttm) of 117.48. Since July 2014, the price dropped by about 69% and is now trading -71.74% from its 52 weeks high and +57.63% from its 52 weeks low.

What investors can find attractive about the company is the dividend yield. CRR is paying a yield of 2.46% with a growth rate of 12.70% over the last 3 years, 13.10% over the last 5 years and 15.30% over the last 10 years. A special remark goes to the payout ratio, that since the year 2011 is rising, and it went from 16% to the current ratio of 346% that looks very dangerous if the company will not take right actions to correct this trend.

As previously said,

Richard Snow (Trades, Portfolio) is the main Guru holding the company. In second position there is Chuck Royce (Trades, Portfolio) who holds 2.26% of shares outstanding, followed by Tom Gayner (Trades, Portfolio) with 0.86%.

Conclusion

As every other oil and gas related company, CRR is struggling to survive the sector’s crisis that started many months back. The company is financially solid even though the economic side is not generating any money.

There are some key factors that make me think positively about the future of the company (and the price, of course).

The first is that the current situation (financial, economic and even price) is mostly due to the oil and gas sector.

The second is that in January, the company’s board of directors authorized the repurchase of up to 2 million shares of their common stocks. This means they have very positive outlook for their business on a long term basis.

Third, as reported on the insiders page, the director is continuously buying shares of the company with about 15,000 to 20,000 shares bought every two days since the last February (a total of about 214963 shares bought).

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Rating:
3 / 5 (3 votes)

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