Are These 2 Companies In General Electric's Sights?

Includes: DRC, DRQ, GE
by: Bret Jensen

General Electric (NYSE:GE) bought lift maker Lufkin Industries (NASDAQ:LUFK) earlier in the year for just less than $4B. This was part of its strategy to grow its presence in the energy services sector as it continues to pare pack its financial businesses. Since 2008, the company's oil & gas services businesses have provided the fastest growth of any of the company's business lines.

I would look for similarly sized purchases as the company beefs up its presence in energy services. The company's cash stockpile is now over $19B and is approaching its highest level in a decade. Obviously speculation is increasing on what is the next move for General Electric is as it expands its energy services business. Here are two companies in the sector that Bloomberg recently stated looked like they could draw the interest of this huge conglomerate.

Dresser-Rand Group (NYSE:DRC) designs & manufactures engineered rotating equipment solutions for the oil, gas, chemical, petrochemical and power generation industries. In its last reported quarter, the company saw earnings grow more than 55% Y/Y and it easily beat bottom line expectations by 12 cents a share.

The stock saw an initial pop in April when General Electric's takeover of Lufkin Industries as investors reach the conclusion that this company would also make a good fit for the industrial giant. Earnings at the company are moving up nicely. The company earned $2.35 a share in FY2012 but is on track to post better than $3 of EPS this fiscal year. Consensus estimates call for almost $4 a share in earnings for FY2014 currently.

Revenue growth is looking like it will come in at 25% Y/Y this fiscal year and the stock sports a five year projected PEG of under 1 (.75). Finally, the company's product lines would fit well within General Electric's current offerings to the oil & gas sector and the stock has an enterprise value (including debt) of less than $6B; easily digestible for a behemoth like GE.

Dril-Quip (NYSE:DRQ) designs & manufactures offshore drilling and production equipment for use in deepwater, harsh environment, and severe service applications worldwide. This business would dovetail well with GE's established manufacturing prowess with big ticket industrial goods like locomotives.

The company is experiencing rapid sales growth with sales expected to increase in the 18% to 20% range for both FY2013 & FY2014. Dril-Quip has an enterprise value of ~$4B. The company posted earnings of just under $3 a share in FY2012 but is on track for better than $4 in EPS this fiscal year. Analysts project the firm will make better than $5 a share in FY2014 as well.

Conclusion: Both of these speculative targets are showing rapid growth and fit well with GE's existing energy services businesses, are within the acquisition size range the company has stated it is looking at and could easily be its next targets as it expands its presence in the sector.

Disclosure: I am long GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.