Industrial equipment stocks ride oil wave
Companies that manufacture drilling equipment are gushing earnings because of drilling activity fueled by record oil prices. T-3 Energy Services, Inc. (NASDAQ:TTES) manufactures so-called blowout preventers (BOPs) used on wells to prevent disasters. Circor International (NYSE:CIR) produces a variety of valves used on oil and gas wells and pipelines.
T-3 recently shifted its focus from rebuilding and servicing other companies’ equipment to manufacturing its own equipment. This strategy shift was in response to customer requests. Its drilling customers desperately needed more subsea blowout preventers but were experiencing lengthy delays on new orders. BOPs are car-sized valves installed on wellheads that instantly seal off the well when excessive pressure is detected. T-3 added these devices to its product line last year by acquiring Energy Equipment and HP&T Products, two related companies that manufacture deep sea BOPs and related equipment. These acquisitions gave T-3 access to new technologies and markets and manufacturing capabilities at 21 locations across North America.
The company is benefiting from robust demand for its blowout preventers. Sales grew 33% last year to $217.4 million, from $163.1 million in 2006, while net income jumped 40% year-over-year to $25.3 million, or $2.15 per share, from $18.1 million, or $1.71 per share. With drilling activity on the rise, demand for blowout preventers continues to expand. China and Russia are expected to deploy 200 new drilling rigs per year over the next several years, and an additional 149 new offshore rigs are scheduled for delivery between 2008 and 2011.
T-3 plans to grow by expanding its manufacturing capacity, introducing new products, extending its geographic coverage and making acquisitions. Spending on facility expansion is budgeted at $5.2 million in 2008, and the company has acquired a foothold in the Middle East through a new joint venture. Product development is ongoing; T-3 has introduced 111 new products since 2003, including its subsea BOP product line introduced in late 2007.
More recent corporate developments include an $8 million multiple rig order in April from a drilling contractor operating in Russia, a $12 million order in May for rig pressure control systems for jack-up rigs shipping to West Africa, and a Middle East joint venture agreement announced in July with Aswan International, a Dubai oilfield equipment manufacturer. Aswan serves customers in the UAE, Kuwait, Qatar, Bahrain, Algeria, Pakistan, Iraq and other Middle Eastern markets.
T-3’s earnings improved 73% during the first quarter of 2008 to $9.5 million, from $5.5 million in the first quarter of 2007. Per-share earnings climbed 47% year-over-year to $0.75 from $0.51. Revenues rose 44% year-over-year to $69.2 million, from $47.9 million. Most of the growth is attributable to original equipment orders, which accounted for 82% of first quarter 2008 revenues. Backlog and outstanding quotes reached record levels of $74.3 million and $319.1 million, respectively, in early May and analysts look for this company to grow 41% this year and 32% annually over the next five years. My $90 price target compares with recent trading in the low $60s per share.
Another investment play on drilling activity is Circor International, a designer, manufacturer and marketer of valves and fluid control products for energy and industrial end-markets. The company has an established global presence, with 17 manufacturing facilities across the United States, Canada, Europe and China. Circor markets its products through 1,400 distributors to over 10,000 customers in 130 countries. It operates through two business groups. The Instrumentation and Thermal Fluid Controls Product Group (52% of 2007 revenues) produces valves, fitting and controls for instrumentation, aerospace, cryogenic and steam applications. The Energy Products Group (48% of 2007 revenues) produces and sells various types of valves for oil, gas and chemical processing.
Circor is using lean manufacturing techniques to improve profitability. Its success is evidenced by consistent improvements in operating margins, which rose to 13.3% in the second quarter of 2008 from 9.5% in the same period last year and 11.0% in the first quarter of 2008. Acquisitions are being leveraged to increase geographic coverage, market share and product offerings. The company’s May acquisition of Motor Technology, Inc. provides Circor with specialized motors and related equipment for the aerospace, defense, medical and transportation markets.
Circor boosted earnings 26% last year to $2.27 per share, from $1.80 per share in the previous year, on 13% growth in revenues to $665.7 million in 2007, from $591.7 million in 2006. Earnings growth accelerated in the first six months of 2008, with net income rising 80% year-over-year to $31.3 million, or $1.85 per share, from $17.4 million, or $1.05 per share .Revenues for the six-month 2008 period rose 17% to $383.2 million, from $327.2 million in the same period last year. In addition to earnings gains from manufacturing efficiencies, Circor is benefiting from strong sales, favorable currency translations and an improved product mix. New orders totaled $439.4 million in the first six months of 2008, and Circor ended the second quarter with order backlog of $446 million, up 19% from backlog of $373.7 million one year ago.
Circor has provided positive earnings surprises in each of the last four quarters, including double-digit surprises in two quarters, and analysts forecast the company’s growth at 53% this year and 27% per year over the longer-term. My $70 price target for Circor compares with recent trading in the upper $50s per share.
Other potentially attractive investments within the industrial equipment and components sector include: Sun Hydraulics Corp. (NASDAQ:SNHY), a maker of valves for fluid power systems; Watts Water Technologies, Inc. (NYSE:WTS), a manufacturer of water safety and flow control products; China Fire & Security Group, Inc. (NASDAQ:CFSG), a producer of fire protection systems for industrial customers in China, and North American Galvanizing & Coatings, Inc. (NASDAQ:NGA), a maker of corrosion- resistant coatings for fabricated steel products.
About the Author
Contributing author Lisa Springer is an equity research analyst with nearly 20 years of investment research experience.
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