Friday, July 19, 2013

A Good Business To Be In

In this post we move on to the fourth largest holding of the exchange traded fund Power Shares S&P Smallcap Energy (PSCE: Nasdaq).  About seven percent of the fund’s value is held in Exterran Holdings, Inc. (EXH:  NYSE), which maintains processing and transportation equipment used by various oil and gas operations.  A large part of Exterran’s business involves natural gas compression and production and the company maintains a fleet of over 7,600 natural gas compression units in the U.S. and another 1,000-plus units in other markets.  The fleet has an aggregate capacity of 4.7 million horsepower -  the way oil and gas players think of compression capacity.  Besides making these compression units available on contract, Exterran also sells components for repair and offers maintenance services to customers that own their compression equipment directly.

It has been a good business to be in as the U.S. natural gas market has flourished.  Exterran reported $3.0 billion in total sales in the most recently reported twelve months, on which it earned $503 million in EBITDA.  Non-cash asset impairment charges totaling $182.9 million have led to a net loss for the period.   Accordingly, we find cash flow from operations a better indicator or Exterran’s health during the period  -  positive $374.0 million or 12.5% of total sales.

The most recently reported quarter ending March 2013 was again in the black.  Sales grew 31.9% year-over-year and earnings were eight times higher than the year-ago period.  The dozen or so analysts with published earnings estimates are apparently optimistic that impaired assets have been mopped up and are predicting profitable quarters for the balance of the year 2013. 

EXH is currently trading at 36.5 times forward earnings, making the stock among the priciest of the ETF’s holdings.  The stock may be fully valued at the current price level.  The consensus price target is $35.00 per share.  What is more a review of the most recent trading activity suggests there is little if any upward momentum in the stock.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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