good piece on NTG one that isn't follwed much:
Thursday November 23, 1:30 am Eastern Time
individualinvestor.com
Stock of the Day: NATCO Group: No Dry Hole Here
By: Alexander Yakirevich (11/23/00)
Investors might be shunning the stocks of some oil and gas equipment suppliers, but insiders at NATCO Group (NYSE: NTG - news) are snapping up shares in a significant way.
Company executives have recently accumulated a hefty amount in this supplier of oil and gas separation and hydrocarbon decontaminating equipment. From Sept. 20 to Oct. 12, three insiders, most notably Chairman Nathaniel A. Gregory, purchased more than 640,000 shares at prices ranging from $1.47 to $8.88. The stock recently closed at $8.
In our view, there are two main factors that could explain the insiders' optimism. On a macro level, the underlying supply/demand situation in the energy sector seems to indicate that the rebound the market's experienced since the 1998-1999 collapse in energy prices is here to stay at least for the next 12 to 24 months.
Arvind S. Sanger, an analyst with Deutsche Banc Alex. Brown, noted in a recent report that ``world capacity utilization is running at over 95%, the tightest it has been in over 30 years.''
According to Sanger, while the expected increase in production by OPEC could drive prices lower -- to the mid $20-per-barrel range next year -- meaningful alleviation of the demand pressure in this market could only be achieved though ``a sustained multi-year increase in oil drilling activity.''
Sanger believes greater exploration activity should translate into robust secular growth in the oilfield services sector, which NATCO is a part of. Specifically, the analyst predicts that industry revenues could expand 10% to 12% in the next few years, while earnings growth could be as high as 25%.
Given these forecasts then, why does NATCO's valuation fail to reflect the industry's growth prospects? After all, the company, which went public in January of this year, delivered spectacular results in the third quarter. During the period, revenues grew 52% year-over-year, to $60.2 million, and earnings increased to $0.17 per share from $0.01 per share last year.
It appears that the main issue for the company has been a declining level of order activity in the company's engineered systems business, which along with the traditional production equipment segment, contributed more than 68% to the top line in the third quarter. This business, which is involved in the development of complex, customized oil and gas separation and purification systems, experienced an order backlog decline of nearly 30% from $60 million posted in the second quarter.
Accounting for most of this backlog: The company's two-year natural gas exploration venture in Malaysia. As a result, investors fear that in the absence of additional orders, NATCO will have a difficult time sustaining its current momentum once the project is completed within the next few quarters.
Deutsche Banc's Sanger thinks that these concerns are overdone. ``Engineered systems recovery [is] a matter of when not if,'' he writes. ``The increase in international and deepwater drilling suggests that demand for large separation systems is coming \205 and NTG will see a meaningful increase in orders over the next six months resulting from its record level of bids outstanding.''
Sanger believes that the company should be able to benefit from internal expansion and through acquisitions. NATCO's balance sheet, which is relatively light on leverage with a long-term debt-to-equity ratio of 0.31 (as of the end of September), should enable the company to pursue accretive acquisitions.
Sanger is expecting NATCO to post earnings of $0.59 per share this year followed by $0.75 per share in 2001 and $1 per share in 2002. Based on these projections, Sanger predicts that the stock should advance to $15 within the next twelve months, which would imply a multiple of 15 times his 2002 estimate.
Looking at the consensus forecast, four analysts providing coverage on NATCO expect the company to generate $0.58 per share this year and $0.74 per share next year. At current levels, the stock is valued at less than 14 times the 2000 estimate, or at a discount to its projected long-term earnings growth rate of 20%.
Bottom Line:
Heavy insider buying at NATCO could be a vote of confidence on the long-term prospects for the oilfield service sector in general and for the company in particular. |
