A Slick Quarter for Carbo Ceramics?

Oil-services firm Carbo Ceramics (NYSE: CRR  ) has been working overtime to meet the demand for its ceramic proppants, devices that smooth the flow of oil through wells. With 52% of the ceramic proppant market, and high oil prices making it both prudent and expedient to extract as much oil from each well as possible, Carbo Ceramics has been riding high.

The high worldwide demand has led Carbo, which supplies its proppants to Halliburton (NYSE: HAL  ) , Schlumberger (NYSE: SLB  ) , and BJ Services (NYSE: BJS  ) , to add facilities to manufacture even more; the company is opening plants in China and breaking ground in Russia. With Canadian sales volume increasing 51% and Mexican sales rising 150% in the most recent quarter, compared with rising U.S. sales of just 5%, Carbo's biggest problem has been to expand capacity fast enough to simply keep up.

LufkinIndustries (Nasdaq: LUFK  ) , an oil-services firm that manufactures reciprocal pumps to extract oil, has also benefited from the surge in demand. Like Carbo Ceramics, its business is based around helping companies get more oil out of existing sites than in the drilling of new wells, and last week it reported earnings that nearly tripled from last year.

Will Carbo do as well? It's due to report its earnings tomorrow. The consensus is for earnings per share to rise by less than 15% and revenues to increase by 14% over last year. Yet the company earlier announced a three-for-two stock split, effective Aug. 19, and boosted the company's quarterly dividend 25%, to $0.15 a share. Last year, it raised the dividend 20%, to $0.12. The company has exhibited all the signs of wanting to boost shareholder value while investing in its own future.

The new facilities, as well as some restructuring at its existing plants, will continue to put a minor drain on Carbo's profits. But the industry will continue to move away from sand-based proppants toward ceramics, which facilitate the flow of oil better but carry a higher price tag. The added cost is worth it to the oil companies and obviously more profitable to Carbo. Its margins have remained strong, even though it was able to raise prices by only 3% last quarter. The company maintains a conservative posture and warns investors that growth this year will be limited.

With a stock price that has appreciated by about 25% over the past year, multiples in excess of the market, and a price-to-sales ratio and PEG ratio ahead of average, Carbo Ceramics seems pricey at these levels. Yet demand continues unabated, and new markets, or previously underserved markets, provide new opportunities for expansion even if costs currently keep profits constrained.

With that in mind, Carbo Ceramics should be able to execute like a well-oiled machine.

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Fool contributor Rich Duprey owns shares of Carbo Ceramics but none of the other companies mentioned in the article. The Motley Fool has a disclosure policy.


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