CE Franklin: Strategic Review Could Pay Off

| About: National Oilwell (NOV)

CE Franklin Ltd. (CFK), a leading supplier of products and services to the energy industry, recently began a strategic review that could generate significant value for shareholders. In the meantime, the company has also engaged in a number of other shareholder-friendly actions that promise to build value over the long-term, even if a sale doesn't happen.

CE Franklin Begins Strategic Review

Earlier this month, CE Franklin announced that it would consider strategic alternatives in the best interest of the company and its shareholders. The formal strategic review process, with the help of CIBC World Markets, will likely weigh the benefits and risks of selling the company versus recapitalizing it or taking other measures to unlock shareholder value.

The move was followed by the implementation of a Shareholder's Rights Plan. While most similarly named plans are synonymous with "poison pills", the company assured investors in their press release that the plan was not intended to prevent a takeover of the company. As a result, some investors believe this may be one of the desirable endpoints of the review process.

Potential Sale Could Pay Off for Investors

CE Franklin appears to be significantly undervalued using several metrics. In 2011, the company reported revenues that increased 11.6% to C$546.4 million and net income that jumped 139% to C$0.79 per diluted share. Despite this growth, the company trades with a price-earnings ratio of just 11x, yielding a PEG ratio of less than 1.0, suggesting it may be undervalued.

According to FinViz, CE Franklin also trades at less than 1x its price-to-sales and price-to-book, suggesting that it's undervalued on a more intrinsic level. Most companies are this way because of lackluster financial results, but it doesn't appear that this is the case with this firm, as demonstrated by the strong financial results above.

A Good Investment without a Sale

CE Franklin remains a great investment even without a sale occurring. In addition to its recent financial strength, the company continues to act upon its share buyback program instituted in 2009. While the buyback only amounted to 3,102 shares in 2011, the total since 2009 has been 618,581 shares, and management indicated that the program is ongoing in 2012.

Finally, the company's business has been picking up. Since it operates in the natural gas sector, the firm has faced some margin pressures with the low gas prices. This year brought a 17% pickup in business that the company, and many analysts, expect to see increase in 2012. And activity now remains below historical averages, which suggests room for upside.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.