ENGlobal: Engineering oil projects
Oil isn’t going away any time soon.
That, in a nutshell, is the investment thesis behind ENGlobal Corp. (Nasdaq:ENG), a Houston company that provides engineering services to the oil industry and has seen its earnings and its stock price surge in recent months in a way that’s mirrored the rising cost of oil itself over most of the summer.
The company’s shares closed Wednesday at $17.69, down slightly from the all-time high of $18.37 a day earlier. as the company continues to ride the momentum of a surprisingly strong second quarter report earlier this month, when earnings of $0.24 came in $0.08 higher than the consensus forecast.
While nobody should be surprised that one of the relatively few stocks currently trading near its high is the stock of a company in the oil industry, ENGlobal is not an actual oil drilling company. Rather, it provides engineering services to oil companies working on building and upgrading refineries and pipelines and conducting feasibility studies on new projects. As such, it stands to profit from growing worldwide oil demand for a long time, even if crude oil prices and U.S. oil demand continue the retreat they have shown in recent weeks.
That’s because even under the most optimistic assumptions for a shift away from oil to cleaner-burning fuels, oil will remain a major energy source for years to come and the oil industry will have to upgrade its infrastructure by building new refineries and enhancing existing ones to support demand. Aging, inefficient refineries in the United States have recently come under the spotlight as a key factor exacerbating high oil prices.
The growing recognition of this need for better infrastructure has helped ENGlobal grow its revenues to $363.3 million in 2007, from $303.1 million in 2006 and $233.6 million in 2005. Last year it reported a $22.8 million operating profit, compared with a loss of $3.6 million the year before.
That long-term growth accelerated in its most recent quarter, which showed a 51.8% rise in revenue and a 71.3% increase in net income. The company’s performance this year has won the notice of two analysts who initiated the stock with “buy” ratings. SMK Capital analyst Craig Bell recently reiterated his “buy” rating on the company’s stock, citing its “stellar” second quarter, in which ENGlobal also showed a reduction in long-term debt.
Four analysts who follow the company on average see net income growing to $0.81 per share this year and $1 per share in 2008, from $0.45 per share in 2007, and project revenue will rise to $485.3 million in 2008 and $551.9 million in 2009, from $363.2 million last year.
So is there any downside here? As with any stock that’s had a strong run, investors have to consider how much potential there still is for recent growth. In his latest research report on the stock, SMK Capital’s Bell issued a price target of $18, which is not that far above its current price.
In the long term both Bell’s price target, and ENG’s stock will probably rise some more, but investors should carefully consider their timing when buying this stock, and look for a dip before stepping in.
That, in a nutshell, is the investment thesis behind ENGlobal Corp. (Nasdaq:ENG), a Houston company that provides engineering services to the oil industry and has seen its earnings and its stock price surge in recent months in a way that’s mirrored the rising cost of oil itself over most of the summer.
The company’s shares closed Wednesday at $17.69, down slightly from the all-time high of $18.37 a day earlier. as the company continues to ride the momentum of a surprisingly strong second quarter report earlier this month, when earnings of $0.24 came in $0.08 higher than the consensus forecast.
While nobody should be surprised that one of the relatively few stocks currently trading near its high is the stock of a company in the oil industry, ENGlobal is not an actual oil drilling company. Rather, it provides engineering services to oil companies working on building and upgrading refineries and pipelines and conducting feasibility studies on new projects. As such, it stands to profit from growing worldwide oil demand for a long time, even if crude oil prices and U.S. oil demand continue the retreat they have shown in recent weeks.
That’s because even under the most optimistic assumptions for a shift away from oil to cleaner-burning fuels, oil will remain a major energy source for years to come and the oil industry will have to upgrade its infrastructure by building new refineries and enhancing existing ones to support demand. Aging, inefficient refineries in the United States have recently come under the spotlight as a key factor exacerbating high oil prices.
The growing recognition of this need for better infrastructure has helped ENGlobal grow its revenues to $363.3 million in 2007, from $303.1 million in 2006 and $233.6 million in 2005. Last year it reported a $22.8 million operating profit, compared with a loss of $3.6 million the year before.
That long-term growth accelerated in its most recent quarter, which showed a 51.8% rise in revenue and a 71.3% increase in net income. The company’s performance this year has won the notice of two analysts who initiated the stock with “buy” ratings. SMK Capital analyst Craig Bell recently reiterated his “buy” rating on the company’s stock, citing its “stellar” second quarter, in which ENGlobal also showed a reduction in long-term debt.
Four analysts who follow the company on average see net income growing to $0.81 per share this year and $1 per share in 2008, from $0.45 per share in 2007, and project revenue will rise to $485.3 million in 2008 and $551.9 million in 2009, from $363.2 million last year.
So is there any downside here? As with any stock that’s had a strong run, investors have to consider how much potential there still is for recent growth. In his latest research report on the stock, SMK Capital’s Bell issued a price target of $18, which is not that far above its current price.
In the long term both Bell’s price target, and ENG’s stock will probably rise some more, but investors should carefully consider their timing when buying this stock, and look for a dip before stepping in.
About the Author
Contributing author Andrea Orr has worked as a financial and business journalist for more than 15 years in New York, Los Angeles and northern California.
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