For the most part we tend to post ‘long ideas’ as we have been consistently bullish throughout 2006. However; from time to time we do publish some ‘short ideas’. For the most recent example see articles on Scottish Re (NYSE:SCT) here and here.
We first mentioned Newpark Resources (NYSE:NR) on 11/17/06 in a comment posted on this article. SA requires us disclose any possible conflict of interest, so we posted an additional comment when we covered the short for a one day 4.9% profit.
The second brief article on Newpark Resources (NR) was syndicated on 12/15/06. Anyone reading the text of the Motley Fool article should have picked up on the numerous discrepancies regarding the published information regarding NR. For instance in the table included in the Fool article the one year return is stated to be 23%. However in the chart depicted at the bottom of the SA article you can see that this is totally incorrect.
Likewise a quick check yesterday on the SA data provider “quotemedia.com” lists the PE for NR as 9.20. This too is obviously incorrect. Likewise EPS is not 0.82 as trailing 12 months EPS is 0.18. Forward EPS estimates are all over the place ranging from 0.35 to 0.55. [Yahoo Finance is not up-to-date on this, also historical data is inaccurate.] The disinformation is mind boggling perhaps instigated by the lack of information for an extended period of time.
Source for trailing PE & EPS: Standard & Poor’s - updated as of 12/15/06. S&P data correlated with SEC filings. Sources for forward EPS: not disclosed. Side note: We do not agree with the S&P fair value calculation of $7.40 and have a similar problem with the S&P fair value calculation for Nabors Industries Ltd. (NYSE:NBR) at $51.90! The latter is $19 over the current trading price. We peg NBR fair value at $40.50.
Sorting Out the Mess
The bottom line is that Newpark Resources (NR) has disappointed investors for the past five years. One scandal after another has fraught this company. Knowing this to be the case, CEO Paul Howes declares that NR is now concentrating on ‘enhancing shareholder value’.
After shutting down the Newpark Environmental Water Solutions division [couldn’t sell it] and assessing the competition in its primary business, NR hired CRA international to ‘evaluate future strategies’. The street interprets this as a ‘for sale’ sign. The recent increase in volume is hype related to this possibility.
The first step taken by NR was to clean up the books. The result was that NR fell behind in its filings and finally on 10/10/06 restated earnings and balance sheet effecting previous statements all the way back to 1998! The net result was; reduction of income by $13.1M for 1998 – 2003 and increase of $1.2M for 2004 – 2005, reduction of assets by $6.6M and stockholders equity by $3.7M for 2005. Now supposedly, the books are clean enough to solicit offers.
Insiders: Buying or Selling?
Another item noticed by analysts is that CEO Howes purchased 20,000 shares on 12/14/06 at $7.11 per share. Normally insider buying is taken as a signal that shares are undervalued. In this case, insider purchases actually offset insider selling. Director Alan Kaufman sold 45,000 shares at $7.01. CEO Howes received 200,000 shares in March this year at $0 and has now effectively paid 10% of market value for 220,000 shares so we wouldn’t take this window dressing too seriously.
Read In Between the Lines
We are not at liberty to go into all the fundamentals plaguing this company however it should be suffice to say that just like we didn’t buy into Scottish Re management statements valuing SCT shares at $12 [now below $5.30], we do not see any offers being tabled at current prices for NR. The competition is fierce in this industry and there is now ample capacity to depress margins in the future. More agile Basic Energy Services (NYSE:BAS) and Superior Well Svcs. (SWSI) are looking to grow their top line aggressively. Most of the future growth is outside the U.S. & Canada an area foreign to NR [remember the Brazil hype?]. In addition, competitors would be more than happy to pick up any void created should NR decide to shut down another division [remember that the E&P waste disposal division declined by about 5% YOY in 2005.]
We feel that NR has missed the boat. The time to have sold this company was last year when future revenues and margins were on the up tick. Revenues from drilling fluids were up 40+% YOY and we now forecast a decline in 2007. The number of rigs in NR’s traditional markets should decline in 2007. A 50% increase in interest expense could throw NR into negative returns. At present we peg an imaginary buyout value at around $6 per share, not more.
There are other similarities between NR and SCT; consult your sell-side analyst for details. For example, notice the preferred shares dividend requirements. Sound familiar?
If you expect a dividend on the common shares anytime soon, see a shrink! This goes hand in hand with net EPS anticipated shrinkage after deducting one time items and preferred dividend requirements on an ever increasing outstanding number of shares [2002 = 73M, 2005 = 86.5M, average increase at 4.6% per year].
Disclosure: In our previous disclosure from 12/15/06 we stated that we may open for our associates new short positions. We did not. We unsuccessfully attempted to open short positions Monday at $7.74. The high for the day was $7.68. We will try again today, perhaps lowering our entry point.
NR 1-yr chart