Please ensure Javascript is enabled for purposes of website accessibility

Here's Why Fairmount Santrol Holdings Inc. Stock Is Sinking Today

By Matthew DiLallo - Jul 20, 2017 at 3:50PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The frack-sand producer received two analyst downgrades today.

What happened

Shares of Fairmount Santrol Holdings Inc. (NYSE: FMSA) sold off on Thursday and were down more than 10% by 2:30 p.m. EDT, after two analysts downgraded the frack-sand producer's stock.

So what

This year has been an abysmal one for investors in Fairmount Santrol Holdings, which is now down 70% after another double-digit sell-off today. Fueling the latest bout of selling is a double dose of analyst downgrades, which are adding insult to injury. One of the downgrades came from Goldman Sachs, which sees more downside ahead for the company. Not only did the bank cut its rating from neutral to sell, but it slashed its price target all the way from $11 to $2 per share. Meanwhile, Credit Suisse threw in the towel by cutting its rating from outperform down to neutral. Incidentally, that wasn't the only frack-sand producer it downgraded today.

Sand-mining night shift with sunset sky

Image source: Getty Images.

Driving these downgrades is the view that Fairmount Santrol's financial results will remain under pressure. First of all, oil prices are about $10 a barrel below what the industry expected this year, which will likely lead to fewer wells getting completed than anticipated, curbing demand growth for frack sand. Meanwhile, Fairmount Santrol's rivals have announced three new sand mines in Texas to supply the red-hot Permian Basin. That puts the company at a disadvantage, since it costs an extra $40 to $60 per ton to bring its sand in from Wisconsin by train. That one-two punch will likely result in lower volumes and pricing for the company in the near term.

Now what

Investors expected that Fairmount Santrol's margins would expand this year as volumes and prices recovered along with oil prices. Instead, oil has fallen, which will likely result in weaker frack-sand demand later this year. Worse yet, the industry is expanding capacity, and those mines are right in the heart of the Permian, which gives them a competitive advantage over Fairmount's mines. That could have a significant impact on its margins, which could send the stock price even lower in the months ahead.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.