Why Does Wall Street Love This Energy Stock?
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
From the tech high-flyers to stable utility companies, everyday investors are wise to consider how Wall Street views every stock in their portfolio. Equally, analysts’ ratings can be used to separate the bullish bets from the bearish ones, so to speak. In addition to this little-used indicator, one measure of sentiment that goes underappreciated is the relative change in ratings revisions. When combined with a bargain-hunting approach, these strategies mesh together quite well.
See, the fear of most value investors is that certain undervalued stocks are trading at cheap multiples for a reason, a situation commonly known as a “value trap.” By analyzing the trends of bullish EPS revisions surrounding these kinds of stocks, we can determine which are likely to jump to a fairer valuation. It goes without saying that this strategy is constructed upon the notion that earnings play a key role on stock prices. Without further ado, here is one undervalued stock that has seen significant year-ahead EPS revisions over the past month.
RPC (NYSE: RES)
RPC, Inc. is a holding company that provides a bevy of oil well products through the likes of Cudd Energy Services, Patterson Services, and ThruTubing Solutions. In addition to selling drilling production and abandonment equipment, RPC also offers workforce education programs, and safety assessment services. Since the recession, shares of the company have gained nearly 240%, outpacing the energy sector as a whole (10.2%), and peers like Schlumberger (NYSE: SLB) at 46.9%, Halliburton (NYSE: HAL) at 38.9%, Weatherford International (NYSE: WFT) at -41.9%, and Superior Energy Services (NYSE: SPN) at 12.1%
Over this same time, RPC has generated consistent top line expansion, averaging an annual revenue growth of 27.3% in a post-recessionary environment where industry peers have averaged just 5.4%. Moreover, superb operating (25.5%) and net (15.6%) margins have allowed the company to sport even more impressive earnings growth, which has averaged 52.8% a year since 2009. In comparison the competitors like SLB (-7.4%), HAL (3.9%), WFT (-44.7%), and SPN (-25.9%), a clear advantage can be seen.
From a valuation standpoint, shares of RPC currently trade at a Price-to-Earnings ratio (8.8X) below the industry average (16.7X), and the likes of SLB (18.2X), HAL (9.9X), and WFT (26.2X). Additionally, the stock is trading below its own 10-year historical average of 10.9X. In fact, over the past decade, RPC’s earnings have been traditionally valued at a 33% discount to those of the S&P 500. This year, they are cheaper, trading at a 39% discount.
Interestingly, the oil well product company has more than tripled its operating cash flows over the past 24 months, though it appears that the markets have yet to take full notice, as its shares trade at a paltry Price-to-Cash Flow ratio of 5.3X. This mark is below the industry average (14.0X), SLB (17.9X), HAL (9.0X), WFT (8.0X), and its own 10-year historical average (11.5X). When growth is factored into the equation, we can see that shares of RPC trade at a PCFG ratio – which is similar to the PEG – of 0.11; typically any figure below 1.0 signals that an undervaluation exists.
In its most recent earnings release, RPC reported a second quarter EPS of $0.33, 3 cents better than the Street’s average estimate. Consequently, this stock has seen a rash of analyst revisions in August – nine to be exact. More pertinently, the consensus EPS forecasts have risen 2.4% over the past month, as year-end estimates currently rest at a mean of $1.40, with a high of $1.76. Assuming that the company at least meets mid-level expectations, fairly valued shares of RPC can eclipse $15 a share by Christmastime; they currently trade in the $12 range. WealthLift’s Sentiment Index rates RPC as a strong buy, with nearly all of the community’s users placing an “overperform” rating on the stock.
Fool blogger Jake Mann doesn't own shares in any of the companies mentioned in this article.The Motley Fool owns shares of Halliburton Company. Motley Fool newsletter services recommend Halliburton Company and Schlumberger. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.