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As the U.S. is focusing on reducing its dependence on others for oil and gas, this has created significant opportunities within the U.S. for companies in the Oil & Gas Equipment & Services Industry. With the U.S. focusing on domestic oil and gas, the International Energy Agency (IEA) is forecasting the U.S. to become the world's largest oil producer by 2020. The above factors should give the oil and gas equipment industry a boost and one company situated in this sector with strong fundamentals is C&J Energy Services, Incorporated (CJES).

In the article below, I will look at C&J Energy Services past profitability, debt and capital, and operating efficiency. Based on this information, we will get to see the company's sales, returns, margins, liabilities, assets, returns and turnovers. We will get an understanding of how the company has grown over the past few years, thus keeping up with industry trends and what to expect in the future.

All numbers sourced from Company Webpage and Morningstar

Profitability

Profitability is a class of financial metrics used to assess a business' ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: net Income, operating cash flow, return on assets, and quality of earnings. From these four metrics, we will establish if the company is making money, and gauge the quality of the reported profits.

  • Net income 2010 = $32 million.
  • Net income 2011 = $162 million.
  • Net income 2012 = $182 million.

Over the past three years C&J's net profits have increased from $32 million in 2010 to $182 million in 2012. This signifies a increase of 468.75% in earnings over the past 3 years.

  • Operating cash flow 2010 = $70 million.
  • Operating cash flow 2011 = $262 million.
  • Operating cash flow 2012 = $283 million.

Operating cash flow is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past three years, the company's operating cash flow has also increased. C&J's operating cash has increased by 304.85%.

ROA - Return On Assets = Net Income/Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."

  • Net income growth

    • Net income 2010 = $32 million.
    • Net income 2011 = $162 million.
    • Net income 2012 = $182 million.
  • Total asset growth

    • Total assets 2010 = $226 million.
    • Total assets 2011 = $538 million.
    • Total assets 2012 = $1.012 billion.
  • ROA - Return on assets

    • Return on assets 2010 = 14.16%.
    • Return on assets 2011 = 30.28%.
    • Return on assets 2012 = 17.98%.

Over the past three years, C&J's ROA has increased from 14.16% in 2010 to 17.98% in 2012. This indicates that the company is making more money on its assets than it did in 2010.

Quality Of Earnings

Quality of Earnings is the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory. To ensure there are no artificial profits being processed, the operating cash flow must exceed the net income.

2010

  • Operating cash flow 2010 = $70 million.
  • Net income 2010 = $32 million.

2011

  • Operating cash flow 2011 = $262 million.
  • Net income 2011 = $162 million.

2012

  • Operating cash flow 2012 = $283 million.
  • Net income 2012 = $182 million.

Over the past three years, the operating cash flow has been higher than the net income. This indicates that the company is not artificially creating profits by accounting anomalies such as inflation of inventory.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

  • Total assets

    • Total assets 2010 = $226 million.
    • Total assets 2011 = $538 million.
    • Total assets 2012 = $1.012 billion.
    • Equals and increase of $786 million.
  • Total liabilities

    • Total liabilities 2010 = $117 million.
    • Total liabilities 2011 = $143 million.
    • Total liabilities 2012 = $413 million.
    • Equals and increase of $296 million

Over the past three years, C&J has acquired more total assets than total liabilities. This indicates that the company has not been financing its assets through debt. Over the past three years, the company's total assets increased by $786 million, while the total liabilities increased by $296 million.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current assets / Current liabilities

  • Current assets

    • Current assets 2010 = $59 million.
    • Current assets 2011 = $224 million.
    • Current assets 2012 = $250 million.
  • Current liabilities

    • Current liabilities 2010 = $59 million.
    • Current liabilities 2011 = $79 million.
    • Current liabilities 2012 = $105 million.
  • Current ratio 2010 = 1.00.
  • Current ratio 2011 = 2.84.
  • Current ratio 2012 = 2.38.

Over the past three years, C&J's current ratio has increased from 1.00 in 2010 to 2.38 in 2012. This indicates that the company has more of the ability to pay off its short-term obligations than it did three years ago. As the most recent number is well above 1, this signifies strength and indicates that the company would be able to pay off its obligations if they came due at this point.

Common Shares Outstanding

  • 2010 shares outstanding = 48 million.
  • 2011 shares outstanding = 51 million.
  • 2012 current shares outstanding = 52.85 million.

Over the past three years, the number of company shares have increased. The amount of common shares have increased from 48 million in 2010 to 52.85 million in 2012.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The gross profit margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross margin 2010 = $90 million / $244 million = 36.89%.
  • Gross margin 2011 = $333 million / $758 million = 43.93%.
  • Gross margin 2012 = $440 million / $1.112 billion = 39.58%.

Over the past three years, the gross margin has increased. The ratio has increased from 36.89% in 2010 to 39.58% in 2012. As the margin has increased, this indicates the company has been more efficient.

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company's income statement and the denominator shows total assets, which are found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth

    • Revenue 2010 = $244 million.
    • Revenue 2011 = $758 million.
    • Revenue 2012 = $1.112 billion.
    • Equals an increase of 355.73%.
  • Total Asset growth

    • Total assets 2010 = $226 million.
    • Total assets 2011 = $538 million.
    • Total assets 2012 = $1.012 billion.
    • Equals an increase of 347.78%.

As the revenue growth has increased more than the assets on a percentage basis, this indicates that the company is making money on its assets.

Based on the nine different criteria above, C&J Energy Services is showing excellent results. The company is showing strength in all aspects of the above analysis. Based on the above criteria, C&J Energy Services is showing that it is a solid company that has been able to take advantage of the growth in the industry over the past couple of years.

Analysts at MSN Money are predicting 20.00% growth in EPS year over year for the next 5 years. This is well above the industry standard of 13.80%.

Valuation

If we use the MSN money estimation of 20.00% growth in EPS year over year for the next 5 years this will form a very attractive PEG ratio and an excellent entry point for the stock.

Current PE Ratio = 7.41 (Google Finance)

7.41 / 20.00 = 0.37

PEG Ratio = 0.37

A current PEG ratio of 0.37 based on an EPS average growth rate over the next 5 years indicates that the stock is currently at undervalued.

Based on the above analysis, C&J Energy Services has shown strong financial strength over the past 3 years. C&J Energy Services is situated in a sector poised for growth and looks to continue its strength and growth in profitability for the next couple of years. The current PEG ratio of 0.37 indicates that C&J Energy Services is currently undervalued which provides an excellent opportunity to invest in a company with a strong balance sheet and excellent growth opportunities moving forward.

Chart sourced by (Finviz)

Source: C&J Energy Services: Look For The Upward Trend To Continue