I don't know about you, but I personally love finding a company that is both simple and exposed to an industry blessed by rapid growth opportunities. Unfortunately, not many companies fit these duel criteria, but every once in a while you stumble across one that does. Such is the case with CARBO Ceramics (CRR +0.00%), the world's largest provider of ceramic proppants.
For those of you not in the loop on what proppants are, here's a little primer. In essence, during the process of hydraulic fracturing (aka fracking) for natural gas and petroleum products, fracking companies have to break apart the hard shale by using high-pressure fluids. In these fluids, companies place little pellets called proppants that serve to hold any fractures open so that the company in question can extract the fuels. Fortunately, for companies like CARBO Ceramics, proppants are required for fracking, presenting a promising opportunity for the company to grow as the industry that its customers are in grows.
However, just because the company is needed at the moment for the industry, it doesn't mean that the company itself is a great investment opportunity. To explore this in a bit more detail, we should assess some fundamental metrics that will allow a peek into the company's financial condition.
CARBO Ceramics vs. U.S. Silica Holdings: income statement
Looking first from a profitability perspective, we see that the company has posted a four-year average return on equity (which is its net income divided by shareholder's equity and which measures the return to shareholders for every dollar invested into the company) of 15.6%. This is generally an attractive rate, and it has increased every year since 2009 with the exception of its 2012 fiscal year end, when its cost of goods sold (COGS) as a percentage of its revenue increased by about 12.4%.
Although it is common to see a company's COGS rise or fall from year-to-year, the main contributor for CARBO Ceramics was more on the revenue side than on the cost side. This can be attributed to the company experiencing higher competition from new market entrants, as well as a general cost-cutting measure by companies seeking to lower the cost of fracking as natural gas prices have fallen over the past few years.
As an alternative to expensive ceramic proppants, some companies are making the shift to silica-based proppants such as those produced and sold by U.S. Silica Holdings, (SLCA +0.00%) or sand proppants like the ones sold by Hi-Crush Partners. As opposed to ceramic proppants, which can go from $0.30 per pound to $0.90 per pound but which offer higher quality extraction capabilities and which are capable of performing in greater depths, silica and sand proppants can sell for as little as $0.019 per pound.
Though intuition might say that selling a lower-priced good would offer lower returns, U.S. Silica Holdings has performed rather well, with a four-year average return on equity of 18.8%, a number that has risen every year since 2009 and that stands at a jaw-dropping 34.2% as of 2012. From the perspective of net profit margin, CARBO Ceramics has a higher (and more consistent) four-year average of 17.3%, as compared to the 9% posted by U.S. Silica Holdings. However, the latter has posted a yearly increase in its net profit margin since 2009, which now beats out, though just barely, CARBO Ceramics at 17.9%.
CARBO Ceramics vs. U.S. Silica Holdings: balance sheet
From a balance sheet perspective, it is hard to argue that either company is poor in quality. For the four years ending in 2012, CARBO Ceramics has an average current ratio of 5.52, which means that for every dollar in liabilities due in the near future, the company has $5.52 in easily liquidated assets with which to meet them. This is higher than the four-year average of 2.37 that was posted by U.S. Silica Holdings, but both are very attractive as they allow the companies financial flexibility.
From a debt perspective, the situation is a bit clearer. CARBO Ceramics, with no debt, seems to be stronger in this area, whereas the long-term debt/equity ratio for U.S. Silica has averaged 1.82. Although this number has decreased to 0.94 as of its most recent fiscal quarter, it should still be monitored since any financial problems will likely arise as a result of being unable to meet its financial obligations.
Foolish takeaway
Fundamentally, both CARBO Ceramics and U.S. Silica Holdings appear to be rather attractive. CARBO Ceramics is superior in terms of its balance sheet, as well as when looked at from a net profit perspective. However, with four-year revenue growth of 130.6% for U.S. Silica (which outpaces the 88.8% growth for CARBO Ceramics), and with rapidly improving margins and already superior return on equity, it is very possible that taking a further look at U.S. Silica could be warranted.
