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Edgen Group: Taking Advantage Of The North American Energy Boom

|Includes: Edgen Group (EDG)

Edgen Group is engaged in distributing pipes, valves, tubing, and related equipment to energy companies. Its customers include ExxonMobil, Chevron, BP, and Shell. Despite a disappointing IPO, Edgen Group (NYSE:EDG) presents an opportunity for tremendous upside relative to its closing price of $7.11.

Positives

1. Energy infrastructure expansion will be a significant tailwind to the business. Energy CAPEX is expected to increase by 10.1% annually between 2012 and 2015.

2. Edgen is well positioned to take advantage of the North American energy boom, as it derives 75% of its revenues from the Americas.

3. Slower global growth is depressing steel prices.

4. Analysts are expecting $1.48 in EPS in 2013 and $1.97 in EPS in 2014. Applying a conservative multiple of 10x to 2013 EPS, we derive an intrinsic value of $14.80.

Risks

1. The company is highly levered with $612 million in long term debt and capital leases, and is rated B3 by Moody's and B+ by Standard & Poor's.

2. Lower energy prices would negatively impact demand from customers.

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