Dril-Quip - Excellent Long-Term Value Creator Offers No Compelling Value Yet At Current Levels

Jun.13.14 | About: Dril-Quip, Inc. (DRQ)


Dril-Quip's shares buck the trend after announcing a $100 million share repurchase program and spiking oil prices.

The company is an excellent long-term growth story, creating tremendous returns for investors.

Shares offer no appeal with a margin of safety at current levels.

Shares of Dril-Quip (NYSE:DRQ) bucked the trend on Thursday as the company benefited from the spike in oil prices as well as a new stock repurchase plan.

The company has an excellent track record in growing its operations in a profitable manner while operating with a rock-solid balance sheet. That being said, the current valuation is a bit too steep for me to pick up shares at current levels as they don't offer a compelling margin of safety.

Share Repurchase Program

Dril-Quip announced that its board has approved a new $100 million share repurchase program. The program, under which purchases will be made in the open market has no set expiration date.

The new program follows the completion of its previous program which also had a size of $100 million. Following completion of this program the company has repurchased 955,539 shares at an average price of $104.65 over the past two quarters.

Investor Presentation

In March, Dril-Quip presented at the Howard Weil Energy Conference. The company presents itself as a pure play in the offshore market, focused on the deepwater segment of this growing market.

The company has strategic locations in Houston, Aberdeen, Brazil and Singapore. Combined with other suppliers, Dril-Quip supplies the largest global energy players out there including Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP), Exxon Mobil (NYSE:XOM) and BP, among many others.

The company has a working rig fleet of roughly 235 rigs by the end of 2013, with 55 new builds expected to be delivered this year and in 2015 combined. These deliveries are focused on deepwater areas.

Financials And Valuation

On the 9th of May, Dril-Quip opened the books for its first quarter. The company ended the quarter with a $1.35 billion backlog, adding roughly $170 million in orders in a period of just three months.

Dril-Quip ended the first quarter with $421.0 million in cash and equivalents. The company has no debt, which results in a solid financial position.

Over the past year, Dril-Quip reported revenues of $872.4 million, which is up 19% on the year before. Net earnings jumped by more than 42% to $169.8 million.

Trading around $103 per share, Dril-Quip is valued at $4.2 billion which values operating assets at $3.8 billion. This values operating assets of the company at 4.4 times annual revenues and 22-23 times annual earnings.

Dril-Quip does not pay a dividend to its investors at the moment.

Long-Term Growth Story

Over the past decade Dril-Quip has aggressively increased its revenues. Total sales rose from little less than $222 million in 2004 to $872 million over the past year, growing at a compounded annual growth rate of 16%.

Earnings growth has been even more spectacular as margins have expanded. The total shareholder base rose by just about 15% over this time period, limiting the effective dilution of the shareholder base.

Of course the company has benefited from an industry which has shown solid growth rates over the past decade, yet the operational improvements have outpaced growth rates reported by industry giants like National-Oilwell Varco (NYSE:NOV) and Schlumberger (NYSE:SLB).

Shares have roughly ten-folded as well over the past decade, although shares have shown great volatility during the 2008 recession with shares plunging from $60 to lows of $20 in a matter of months.

Takeaway For Investors

As a matter of fact, momentum has pushed shares to highs of $120 in October of last year, after which shares sold off to current levels around the $100 mark.

The momentum in operations stalled this year as earnings rose by just 7% in the first quarter on an annual basis. A $10 million revenue equipment item was completed but not accepted for delivery, as Dril-Quip is currently in discussions with the customer to resolve the issue.

As a result of this issue, the full-year guidance is reduced by thirty cents per share to $4.70 to $4.90 per share which values shares at 19-20 times forward earnings after backing out the net cash position. Very comforting to investors, the backlog has continuously grown and even outpaced revenue growth. The total backlog is now over 1.5 years of its current rate of annual revenues.

While the company has a tremendous track record, shares are no obvious buy trading at multiples in their low twenties in a favorable operating environment. Despite the long-term growth prospects of the industry, I would like to have a greater margin of safety before picking up shares. A 17 times earnings multiple, in line with the valuation of the rest of the market would translate into a buying target of $90 per share.

Disclosure: The author is long COP, CVX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.