Tags: Carbo Ceramics | stock | price | earnings

Carbo Ceramics: Revenue and Earnings Growth Too Slow to Justify the Company's Stock Price

By    |   Wednesday, 05 February 2014 10:39 AM

Carbo Ceramics (CRR) is another of those story stocks that sounds great on the surface, but whose revenues and earnings growth paint a different picture.

The Houston company makes products that enable oil and gas drillers to extract greater amounts of those hydrocarbons from wells below the earth’s surface, as compared to traditional methods.

Specifically, the company is the world’s largest producer of ceramic proppant, a material that helps to expand fractures in rocks beneath the earth’s surface and, therefore, to increase the amount of oil and natural gas that is recoverable from oil and gas wells that surround those rock formations.

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In addition to making ceramic proppants, which are stronger, and therefore more effective than sand proppants, Carbo Ceramics also makes resin-coated sand proppants.

Proppants are added to various types of fluids used in hydraulic fracturing, a process that consists of pumping fluids down a natural gas or oil well at pressures that are sufficient to create fractures in hydrocarbon-bearing rock formations.

Proppants fill the fractures and help to keep those fractures propped open once the high-pressure pumping stops, thereby creating conductive channels through which hydrocarbons can flow more freely from rock formations to oil and gas wells and then to the surface. More commonly referred to as “fracking,” hydraulic fracturing is the most widely-used method of increasing production from oil and natural gas wells.

In addition to making ceramic and resin-coated proppants, Carbo Ceramics also makes a proppant that utilizes a tracer material to help oil and gas drillers to determine the locations of fractures in oil and gas wells.

The company also makes the most widely used fracture design modeling software in the world. That software, which enables oil and gas drillers to model almost limitless combinations of well configuration, proppant placement, conductivity improvements and fracture dimensions, in any type of reservoir, helps those drillers to maximize their production of oil and gas.

The widespread use of fracking that began during 2005 has led to an oil and gas boom in the United States, Canada and China, which possess the world’s largest, fourth largest and fifth largest reserves of shale gas, respectively. As a result of that boom, the production of natural gas from shale gas rose to 20 percent of the United States’ total production of natural gas during 2010, from only 1 percent during 2000.

Looking forward, the U.S. Energy Information Administration estimates that by the year 2035, 46 percent of the United States' natural gas supply will come from shale gas. Separately, the National Petroleum Council estimates that hydraulic fracturing will eventually account for nearly 70 percent of natural gas development in North America.

Unfortunately, Carbo Ceramics was unable to capitalize on that boom over the past two years, with the company’s revenues rising by only 3.2 percent and 3 percent during 2012 and 2013, respectively. During those same periods, the company’s net income fell by 18.6 percent and 20 percent, respectively.

Of even greater concern, my research indicates that Carbo Ceramics will continue to fail to capitalize on a large scale from the fast growth that industry experts are projecting for the fracking industry over the next several years due, primarily, to an increasing number of competitors entering the proppant business.

In regard to Carbo Ceramic’s expectations for the current year, the company’s CEO, Gary Kolstad, said on Jan. 30, “In the near term, we expect ceramic proppant volumes for the first quarter of 2014 to increase when compared with the fourth quarter of 2013.”

He added, “Current market conditions remain competitive, which leads us to believe that pricing may remain at current levels. However, Kolstad failed to give any specific forecasts for the company’s revenues and earnings for the quarter ending March 31, 2014, or for the full year ending Dec. 31, 2014.

Kolstad’s weak statements and lack of any specific revenue and earnings guidance suggest to me that Carbo Ceramics will continue to grow its revenues at a slow pace, and that its net income might continue to decline, during the months ahead.

With CRR closing on Tuesday at a price-to-earnings (P/E) multiple of 30, and my research indicating that the company will be able to grow its net earnings at a pace of no faster than 10 percent per year, on average, over the next 3 to 5 years, financial market participants appear to be overvaluing CRR substantially.

Therefore, I urge investors and speculators alike to not put any of their money into Carbo Ceramics at this time.

If, however, the company were to use a portion of its cash, which covered almost all of the company’s financial obligations as of Sept. 30, 2013, my viewpoint on Carbo Ceramics might change dramatically.

Therefore, I also urge financial market participants to monitor the company’s press releases closely for potential announcements of planned acquisitions.

Early Wednesday, Carbo Ceramics was down $1.82, or 1.6 percent, at $ 109.80.

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David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the President and Chief Market Strategist of Frazier & Mayer Research, LLC (dba
www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.

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Carbo Ceramics (CRR) is another of those story stocks that sounds great on the surface, but whose revenues and earnings growth paint a different picture.
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Wednesday, 05 February 2014 10:39 AM
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