DXP Enterprises: Investors' Sentiment Holds The Key For Now

Mar. 29, 2020 3:39 PM ETDXP Enterprises, Inc. (DXPE)
Badsha Chowdhury profile picture
Badsha Chowdhury
1.15K Followers

Summary

  • A contraction in the energy market will lead to a fall in demand in the short-term.
  • Signs of recovery in industrial activity in 2020 and the U.S. government’s latest stimulus package may compensate for some of the demand declines.
  • A leveraged balance sheet can become a concern in the medium-term.
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Market Sentiment Drives The Price

Between a slump in energy market activity and a partial revival in the industrial activity, DXP Enterprises’ (NASDAQ:DXPE) outlook hangs in the balance in early 2020. The recent rescue package mooted by the government can, however, uplift the sentiment. However, the negative bias is strong enough to ignore any positivity in the short-term, and so, I think the returns from the stock price will say depressed.

Although DXPE’s gross margin contracted in Q4, I think it would stabilize in 1H 2020 and improve in 2H 2020 because the company provides innovative designs and quality solutions that will attract a premium. It has no significant financial obligations in the near-term. But, the company’s leverage is high, which can become a concern if the energy price stays low for long and cash flow dries up. Until the energy market environment improves, I suggest investors keep a close watch on the stock.

What Are The Indicators Showing?

The Coronavirus outbreak and the supply glut following the OPEC+ negotiation breakdown are the two most significant short-term challenges ahead of the energy industry. The International Energy Agency (or IEA) now estimates as much as 3 million barrels per day of crude oil supply can get added in April 2020, resulting in even lower crude oil prices. COVID-19 could lower global E&P project sanctioning by up to $131 billion, or about 68% year-on-year, estimates Rystad.

The West Texas Intermediate (or WTI) crude oil price has crashed to ~$24 per barrel, which is 60% below the level it was at the beginning of the year. Interestingly, from September until December/end of 2019, the average crude oil price was up by 8%. After falling freely in 2H 2019, the completed wells, as well as the drilled but uncompleted wells (or DUCs) in the EIA-designated key shales, have exhibited considerable resilience in 2020 so far.

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This article was written by

Badsha Chowdhury profile picture
1.15K Followers
I have more than 14 years of experience in analyzing and writing on stocks. I write on both long and short sides in an unbiased manner. I have been covering the energy sectors for the past 7 years, with the primary focus on the oilfield equipment services sector. I also cover the Industrial Supply industry. I occasionally co-author with Seeking Alpha contributor Thomas Prescott.

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

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