Catalysts that Make Grant Prideco (GRP) a Buy

Today I'd like to talk about Grant Prideco, Inc. (GRP), an oil services company that is trading at a discounted valution compared to its growth. It may not be best of breed but its valuation and growth make it very compelling.

Grant Prideco, Inc. offers various oilfield equipment and services to the oil and gas industry worldwide. It operates through three segments: Drilling Products and Services, Drill Bits, and Tubular Technology and Services. The Drilling Products and Services segment manufactures and sells drill pipes, drill collars, heavyweight drill pipe, and drill stem accessories (Full Y! Finance company profile).

Catalysts that make GRP a buy:

* The company has recorded strong growth over the past several years. Since '01, revenues have nearly doubled. Over the same period, operating margins have widened, which has led to an explosive rise in earnings. Per share profits totaled $1.74 in 2005 versus just 51 cents per share in '01.

* Analysts expect this strong growth to continue, as is evident by the five-year projected growth rate of 32.8% vs GRP’s peers have a five-year projected growth rate of 23%.

* Despite the strong growth and bullish prospects, GRP trades at a discounted valuation. GRP's forward multiple is just 15.71 for growth of 32.8%, versus HAL 18.15 for growth of 20% and SLB 21.9 for growth of 22%.

* Judging by GRP’s track record, the long-term forecast could prove to be conservative. The company has exceeded expectations for 10 consecutive quarters. Most recently, GRP reported first-quarter results of 67 cents per share, nine cents above expectations.

* The company anticipates generating profits of between $2.75 and $2.85 this year. Analysts are more optimistic, forecasting earnings of $2.89 per share for 2006. Both the 2006 and the 2007 consensus estimates were revised upwards following GRP’s first-quarter report.

* GRP should be able to generate pricing traction in drill pipe, where it has a leading market share, given high activity in both land and offshore drilling. Based on management's view of rising demand, as well as the company's recent cost rationalization program, management anticipate that operating margins will continue to widen. Rising rig counts and higher drilling activity should deplete operators' inventories of drill pipe and related products.

Bottom line: GRP trades at a discounted valuation despite strong growth and rising expectations. The company has recorded explosive earnings growth and is expected to maintain a strong growth rate into the future. As long as crude prices remain at elevated levels, GRP should do well.

GRP 1-yr chart:

Disclosure: I do not own the stock.

Comments

[Faisal Laljee:]

Thanks for reminding me of this company just as it rests at its 200 DMA. Due to the down market today, the stock is now trading at 11 times 2007 earnings with a PEG of less than 0.5. Great stock.

2006 Jun 19 09:17 PM