Before you continue into this article, take a look at this five-year chart. This chart really represents the ideal stock for a long-term, buy-and-hold investor: The stock price has multiplied and has done so steadily, with pronounced and easy-to-spot buying opportunities. In fact, this company is a technology and innovation-heavy oil services provider which has aligned itself with the long-term trend of increasing service intensity in a world where oilfield discovery and development is becoming increasingly complex. And, as you can see, this company has harnessed the trend and has monetized it into gains for shareholders.
That company is Core Labs (NYSE: CLB ) , and I believe that Core continues to be a great long-term investment. Not only that, I believe Core Labs is a solid buy right now due to a pronounced drop in share price despite continually strong fundamentals.
Core is a mid-cap oil servicer focusing on production enhancement and reservoir optimization. The company has carved out a niche for itself by developing patented technology. Unlike bigger oil service firms such as Schlumberger (NYSE: SLB ) , Core exclusively focuses its effort on intellectual capital and avoids capital-intensive heavy machinery. In doing so, Core has put up stellar return on capital and free cash flow numbers.
...But why is it down?
Core Labs' stock often experiences large drops after earnings reports, often because expectations from investors get too high. This quarter's situation is actually a bit different. Earnings and revenue were affected by bad weather in shale drilling territories and a few project delays from the company's deepwater customers. However, these are both temporary concerns. In any case, the overall results really weren't so bad:
- Currency adjusted net income was up 7% year on year.
- Earnings per share grew 19% year on year. The discrepancy between net income and earnings per share was due to heavy share buybacks, something management is very fond of doing.
- Year over year revenue, however, increased by only 1%.
Breaking things down by business segment, Reservoir Description, which is heavily focused on deepwater servicing, had only a slight increase in revenue. This can be blamed on delays in deepwater projects and cost overruns on the part of customers which Core Labs services. Production Enhancement, which has a heavy focus on shale oil and Gulf of Mexico deepwater, saw a 3% increase in revenue. Results were held back by extreme winter weather in North America. Margins were up 270 basis points in this segment. The strongest segment this quarter was Reservoir Management, which has broad exposure to conventional, unconventional, and deepwater oil activity. Operating income here was up 7%, thanks in part to new projects in the Woodbine Shale in east Texas.
As you can see, Core Labs is not a 'high growth' company, at least not on the top line. Investors in Core Labs can expect mid to high single-digit top-line growth but double-digit earnings-per-share growth over time due to buybacks.
Management's explicit goal is to maximize return on equity, thereby generating lots of free cash flow. Management then takes that free cash flow and uses it to decrease the share count. While this approach is different from the dividend-centered approach preferred by many these days, no one can argue that Core's method hasn't worked. Share count is as low as it's been since 1995 and the stock routinely hits all-time highs.
Lets look at this chart again, this time with a focus on 10% drops over the past five years. Since 2010 we have seen four steep, 10% price drops, and three of those four have been buying opportunities. As of today, April 24, Core shares are down by 9%. The stock's predictable trend, along with the company's reliable earnings growth performance, make Core a buy right here.
In closing, Core Labs' unique strategy of focusing on capital discipline, free cash flow and returns to shareholders has worked brilliantly over the last twenty years. As oil and gas service intensity continues to increase, I believe that Core Labs will continue to deliver outsized returns to shareholders.
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