The huge profits raked in by oil companies over the past several years have been well documented, and the major oil refiners and marketers, such as Exxon Mobil, Chevron and ConocoPhillips are well known throughout the country and the world. But those giants aren't the only companies benefiting from the energy sector boom. Firms that make drilling equipment, and those that offer drilling or other oil well-related services, are also posting impressive earnings.
The industry has also gotten some buzz recently because Transocean , the world's largest offshore oil driller, just announced it is buying drilling rig operator GlobalSantaFe for $18 billion. In light of that big merger, and the big profits recently posted by the industry, I decided to check which oil well equipment/services firms get approval from my "guru strategies" computer models that are each based on the philosophy of a different Wall Street great.
While Transocean and GlobalSantaFe both come up short on support from the strategies, several others do make the grade from one or more gurus. Below is a look at some of those stocks that have strong appeal to the investing styles of some of Wall Street's all-time best.
Precision Drilling Trust: Based in Calgary, Precision Drilling Trust is Canada's largest contract oil and natural gas driller, boasting a fleet of more than 240 land rigs. It also offers oilfield supplies and rentals and oil well servicing. PDS has done about $1.26 billion in sales over the past 12 months and has a market cap of $2.86 billion.
Precision Drilling is the lone oil well equipment/services company that gets approval from more than one of my guru-based models, and the combination is a strange one: It generates strong interest from both my Benjamin Graham-based strategy--a conservative, value approach--and my Peter Lynch-based growth model, which actually considers the company a "fast grower." PDS is one of just three stocks in the market that currently gets approval from both the Lynch and the Graham strategies.
My Graham method targets companies that increase earnings per share by 30 percent over a 10-year period without having any negative annual earnings-per-share postings in the past five years; these firms tend to be financially secure and have a proven record of success over time. Precision Drilling Trust's growth over the past 10 years is an impressive 200.8%, and it has posted positive earnings in each of the past five years, passing that test.
In addition, Graham likes companies that have a ratio of current assets to current liabilities of 2 or greater, because these businesses are typically financially secure and defensive. With a current ratio of 2.5, PDS makes the grade.
Graham also liked companies with larger sales figures, because they tend to be less volatile and less prone to surprises than smaller companies. My Graham strategy therefore targets companies with at least $340 million in trailing 12-month sales; PDS's $1.26 billion sales volume easily meets that criterion.
My Lynch-based model, meanwhile, considers PDS a "fast grower"--Lynch's favorite type of investment--because of its 41.28% growth rate (based on the average of the three-, four- and five-year earnings per share figures).
To find growth stocks still selling at a good price, Lynch famously uses the P/E/growth ratio, which divides a stock's price/earnings ratio by its historic growth rate. P/E/G ratios lower than 1 are acceptable and indicate that the stock is still a good buy at its current price; P/E/Gs under 0.5 are the best case. When we divide Precision Drilling Trust's 5.89 P/E ratio by that 41.28% growth rate, we get an excellent P/E/G ratio of 0.14, which falls into that best-case category. (I would note that PDS's high growth rate will be difficult to maintain over the long term, but even if the company posts growth numbers half that size in the future it will be well off.)
Lynch also likes companies that are conservatively financed, and the model I base on his writings requires firms to have debt/equity ratios less than 80%; at just 13.22%, Precision Drilling Trust again easily makes the grade, another reason this strategy looks highly on it.
National Oilwell Varco: This Houston-based company designs, manufactures and sells equipment and components used in oil and gas drilling and production, and also offers services such as oilfield inspection. More than 140 years old, the company has products ranging from spare parts for drilling equipment and rigs to comprehensive drilling systems. It has a $22.1 billion market cap.
National Oilwell Varco also gets approval from my Lynch-based strategy, which considers the company another "fast grower" because of its 43.96% growth rate (based on the average of the three-, four- and five-year earnings per share figures).
When we divide National Oilwell Varco's 21.77 P/E ratio by that 43.96% growth rate, we get a P/E/G ratio of 0.5, which passes my Lynch-based model's most critical test with flying colors. (Like PDS, NOV's high growth rate will be difficult to maintain in the long term, but even if the company posts growth numbers half that size, it should be well off.)
One note of interest: Recently, NOV's stock soared more than 10% after the company announced that its second-quarter earnings more than doubled. But while the price jumped, the earnings jump was enough to actually decrease the stock's P/E/G ratio, meaning that the stock remains a good buy.
Another reason my Lynch-based model likes NOV: The firm's 14.64% debt/equity ratio.
Having unsold merchandise pile up is never a good sign, and my Lynch model sees it as a red flag when inventory increases faster than sales. National Oilwell Varco's inventory/sales ratio decreased from 33.16% last year to 30.43% this year; sales are increasing faster than inventory is piling up, which this method likes.
Cameron International: Also based in Houston, Cameron makes pressure and flow controls used in oil exploration and production. Its products, which include a variety of valves, wellheads and blowout preventers, are used in onshore, offshore and subsea systems. The company has more than 12,500 employees and a market cap of $8.67 billion.
Cameron is another fast grower that my Lynch-based model likes. Its 25.19 P/E ratio and 49.12% growth rate (again based on the three-, four- and five-year EPS figures) make for a very strong 0.51 P/E/G ratio, indicating that the stock is selling at a good price and passing my most critical Lynch-based test. (This is another case in which you should not count on a growth rate that high continuing over the long term. But, again, if Cameron can post growth even half that growth rate in the future, it should be in good shape.)
Cameron also earns approval from my Lynch-based model because its debt/equity ratio of 56.01%, while not as good as that of National-Oilwell Varco, is still under the method's 80% limit.
In addition, Cameron's inventory/sales ratio dropped from 28.03% last year to 26.97% this year, a good sign, according to my Lynch-based strategy.
FMC Technologies: Here's yet another Houston-based favorite of my Lynch model, but this time with a twist. FMC designs, manufactures and services a variety of systems used by oil and gas companies, including subsea production and processing systems, surface wellhead systems, high-pressure fluid control systems and marine loading systems. But in addition, it makes food processing equipment as well as specialized equipment for the aviation industry. It has a market cap of $6.15 billion.
My Lynch model likes FMC's Technologies P/E ratio (20.14) and its growth rate (39.1%, based on the average of the three-, four- and five-year EPS figures). Those two stats make for a strong 0.52 P/E/G ratio, which passes my Lynch-based model's most important test and barely misses falling into the method's "best-case" category.
FMC's debt is also manageable according to this model. Its debt/equity ratio, 41.78%, is about half of the strategy's 80% maximum.
Bristow Group: Bristow isn't your typical energy sector-related firm. One of the largest helicopter services companies in the world, it contracts with oil services firms to bring personnel to offshore production platforms and drilling rigs. It also offers search-and-rescue services. In addition, through its Grasso Production Management subsidiary, Bristow provides offshore platform production management services, such as staffing and on-site management of offshore facilities. It has a market cap of $1.2 billion and is based in--where else?--Houston.
Bristow catches the eye of the growth strategy that I base on the writings of James O'Shaughnessy. When looking for growth stocks, O'Shaughnessy targets companies whose EPS have grown each year over the past five years. Over the past half-decade, Bristow has posted EPS of $1.66, $2.15, $2.20, $2.45 and, most recently, $2.74, passing this test.
While Lynch uses the P/E/G ratio to find growth stocks still selling at a good price, O'Shaughnessy finds cheap growth stocks using the price/sales ratio. P/S ratios below 1.5 are acceptable to him, so BRS's P/S ratio of 1.33 passes my O'Shaughnessy-based model's test.
In addition, Bristow's market cap, $1.2 billion, is greater than the $150 million minimum this model uses to screen out companies that are too illiquid. Bristow's relative strength (81) is also among the top 50 of all stocks that pass the three aforementioned O'Shaughnessy-based criteria, passing this strategy's final test.
As oil prices continue to push higher, the major energy companies will continue to get a lot of press. But while their profits keep soaring, don't forget that there are also other firms making hay because of the energy sector's boom. Those I've mentioned here all have strong earnings growth, manageable debt and prices that, in many cases, haven't caught up to their earnings growth. Furthermore, the sell-off in stocks has created an opportunity to get into one or many of these stocks at even more attractive prices than just a few weeks ago. I believe that any of these could be a good choice to consider adding to your portfolio.
by John Reese (Validea)