After a tough month in March in which the energy sector unperformed the S&P 500 by over 6%, I expect the sector to play catch up and outperform the market in the second quarter. Oil prices have remained elevated and the major oil company's budgets show healthy capital spending plans. One fast growing, small cap oil services firm I think is significantly undervalued is Tesco Corporation (TESO)
Company description: "Tesco Corporation engages in the design, manufacture, and service delivery of technology based solutions for the upstream energy industry worldwide. The company's Top Drive segment manufactures, sells, and supports top drives used in drilling operations to rotate the drill string while suspended from the derrick above the rig floor. This segment's product line includes various portable and permanently installed top drive products with lifting capacities of 150 through 750 tons, which are hydraulically and electrically powered". (Business Description from Yahoo Finance)
Seven reasons why Tesco is significantly undervalued at $14 a share:
- Tesco is expected to have fast EPS growth over the next couple of years. The company made 69 cents a share in FY2011. Analysts expect TESO to improve earnings by over 60% to $1.13 a share in FY2012, and then book $1.42 in profits in FY2013
- The median price target on TESO by the seven analysts that cover the stock is $21 a share, approximately 50% above current price targets. The lowest price target by these seven analysts is $19 a share on the stock. S&P has its highest "Strong Buy" rating on TESO.
- Consensus earnings estimates have improved meaningfully for FY2012 and FY2013 over the past two months.
- The continuing recovery in the Gulf of Mexico should be a catalyst for growing its tubular services division's (about 30% of overall sales) revenue at a faster pace.
- The stock is selling in the bottom third of its five-year valuation range based on P/S, P/CF and P/B.
- The company is cheap at 10 times forward earnings, given analysts expect it to grow revenues by over 20% in FY2012 and around 13% in FY2013.
- TESO is down some 40% from its highs over the last summer. Insiders have substantial stake in the company and have sold less than 1% of their shares over the last year.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TESO over the next 72 hours.