CARBO Ceramics, Inc. (CRR) is the world's largest supplier of ceramics proppant. It is a relatively small company but offers great promise on future profits. Due to its strong competitive advantage, focused research and development, and excellent balance sheet, CARBO has successfully maintained its leadership position in the industry. In addition, its cheap stock offers long term investors a handsome entry point.
Important Factor For Analysis:
CARBO's products are used by oil and gas producers for the hydraulic fracturing procedure. CARBO makes ceramic and resin-coated proppants that increase the productivity of the oil producers. CARBO also provides the industry's most popular hydraulic fracture simulation software. The company has done very well over the last few years and is expected to continue to be a leader in its industry. CARBO was recently listed in Forbes' "America's Best Small Companies" list. The company ranked 65th.
CARBO gains its competitive advantage from three different factors. They are price/performance ratio, on-time delivery performance, and technical support. The company's products are competitively priced, but more importantly, it has gained an edge due to its superior technical support. CARBO has also had good delivery performance. Such better performance, through better technical support and on-time delivery, helps the company maintain its superiority in the market.
"Economic Conductivity is a sophisticated financial analysis of a stimulated reservoir's ability to achieve maximum payout through optimized productive capacity." The above graph demonstrates the company's cost efficiency. Such strong advantage should keep the business model durable.
CARBO puts a large amount of emphasis on research and development. The company offers "the most widely used fracture design modeling software in the world." The software effectively simulates the fracturing procedure and offers advice on better use of proppants. In addition, CARBO has developed a new proppant that carries greater strength and conductivity when compared to the older products. This new proppant would be used in ultra-high stress wells. It should be launched before the end of 2013. CARBO is also deeply involved in the development of alternative products for use as proppant. These products are not expected to impact the use of ceramic proppants, however.
The company has a very good current ratio, at 6.88. CARBO has done a good job of managing its cash and should not have liquidity problems in the near future. In addition, the good cash position would help the company make key acquisitions.
The company does not have long term debt. As a result, the equity to assets ratio is very high, at .88. Again, the low debt provides freedom to make important acquisitions.
CARBO sells at a relatively low PE ratio of 16.33. The market has oversold the stock in recent days due to lower earnings expectations for the future. However, the good business model and emphasis on research and development should keep the company around for a long time.
At the current PE ratio, the company is a buy for the long term investors.
The company must continue to innovate and stay ahead of the competition. CARBO's products are superior to its competitors and that has led to higher profitability in the last decade. It must continue to innovate and maintain its high quality technical support to maintain that edge in the market.
CARBO must also keep its current ratio high. At the current levels, it has enough leverage to enter the market for acquisitions. The company must maintain that freedom.
CARBO's stock is a "BUY" for the long term investors. CARBO gains a competitive position due to its excellent business model and safe balance sheet. CARBO shows great promise and is a great add to a long term portfolio.