Rating Update: Stock Rating F-Lowest (8/21/19)-Exterran Corp (EXTN).

out_logo_500#72716.jpg

BUSINESS

Exterran Corporation engages in the compression, production, and processing of products and services for the oil and natural gas industry worldwide. The company operates through three segments: contract Operations, Aftermarket Services, and Product Sales. Its contract operation services include personnel, equipment, tools, materials, and supplies. The company also sells parts and components; and provides operation, maintenance, overhaul, upgrade, commissioning, and reconfiguration services, as well as integrated infrastructure solutions.
out_plist#72716.jpg

INVESTMENT RATING

out_map1#72716.jpg

EXTN’s future returns on capital are forecasted to fall short of the cost of capital. Accordingly, the company is expected to be a modest Value Eraser.

Exterran has a current Value Trend Rating of F (Lowest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing inconsistent signals. Exterran has a neutral Appreciation Score of 52 but a very low Power Rating of 1, resulting in the Lowest Value Trend Rating.

Exterran’s stock is selling below targeted value. The current stock price of $10.56 compares to targeted value 12 months forward of $13.
This neutral appreciation potential results in an appreciation score of 52 (48% of the universe has greater appreciation potential.)
out_pt#72716.jpg

Exterran has a Power Rating of 1. (This very low Power Rating indicates that EXTN only has a better chance of achieving attractive investment performance over the near to intermediate term than 1% of companies in the universe.)
Factors contributing to this very low Power Rating include: EXTN’s earnings estimates have fallen very significantly in recent months; recent price action has been extremely unfavorable; and is currently in an unfavorable positi.

INVESTMENT PROFILE

Exterran’s financial strength is low. Financial strength rating is 26.
out_pfit1#72716.jpg

Relative to the S&P 500 Composite, Exterran Corp has significant Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that EXTN is higher risk. All factors are relative weaknesses. Relative weaknesses for Exterran include: low historical profitability, low financial strength, low expected growth, and low historical growth. Exterran’s valuation is high: low dividend yield, high P/E ratio, and low price/book ratio. EXTN has unusually low market capitalization.

CURRENT SIGNALS

Exterran’s current operations are eroding. Return on equity is falling, reflecting: and falling tax keep rate.

Exterran’s current technical position is very weak. The stock price is below its 200 day moving average which is in a downtrend. Exterran’s stock price decline is extreme and the stock appears oversold.

ALERTS

Positive development: significant quarterly earnings acceleration occurred. Negative development: the consensus estimate for December, 2020 decreased significantly.
The stock is currently rated F.
On 8/21/19, Exterran Corporation (NYSE: EXTN) stock enjoyed a major increase of 33.1%, closing at $0.03. Moreover, this advance was accompanied by above average trading volume at 132% of normal. Relative to the market the stock has been extremely weak over the last nine months but has risen 7.3% during the last week.

CASH FLOW

In 2018, Exterran experienced a very significant reduction in cash of -$30.2 million (-61%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$202.2 million. Non-operating sources contributed +$0.6 million (+0% of EBITDA). Cash taxes consumed -$43.2 million (-21% of EBITDA). Re-investment in the business amounted to -$184.2 million (-91% of EBITDA). On a net basis, debt investors removed -$3.3 million (-2% of EBITDA) while equity investors received -$2.4 million (-1% of EBITDA).
out_cflow.1#72716.jpg

Exterran’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Exterran Corp Peer Group. (Since 2015 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, Exterran was in the top quartile. Currently, Exterran is at the upper quartile at +0% of EBITDA (+$0.6 million).

Exterran’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Exterran Corp Peer Group. In most years, Exterran was in the lower quartile. Currently, Exterran is lower quartile at -21% of EBITDA (-$43.2 million).

Exterran’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Exterran Corp Peer Group. (Since 2016 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Exterran was in the second quartile. Currently, Exterran is lower quartile at -91% of EBITDA (-$184.2 million).

Exterran’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Exterran Corp Peer Group. (Since 2016 Debt Investors, %EBITDA has experienced a very sharp recovery.) In most years, Exterran was in the second quartile. Currently, Exterran is above median at -2% of EBITDA (-$3.3 million).

Exterran’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Exterran Corp Peer Group. In most years, Exterran was in the second quartile. Currently, Exterran is slightly above median at -1% of EBITDA (-$2.4 million).

Exterran’s Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Exterran Corp Peer Group. In most years, Exterran was in the second quartile. Currently, Exterran is substantially below median at -15% of EBITDA (-$30.2 million).
out_cflow.2#72716.jpg

Exterran’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Exterran Corp Peer Group as well. In most years, Exterran was in the lower quartile. Currently, Exterran is lower quartile at +1%.

PROFITABILITY

Exterran’s return on equity has eroded very significantly since 2013 although it recently stabilized from the 2016 level.
Exterran’s minor negative trend in pretax operating return significantly augmented by a very strong negative trend in non-operating factors is a major performance consideration.
The productivity of Exterran’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
out_dpgrfs3#72716.jpg

Exterran’s return on equity is lower quartile (-4.3%) for the four quarters ended June, 2019.
out_dpgrfs3.2#72716.jpg
Operating performance (pretax return on assets) is below median (1.3%) reflecting asset turnover that is at the upper quartile (0.87X) and substantially below median pretax margin (1.5%).
Tax “keep” rate (income tax management) is lower quartile (-103.%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is at the upper quartile (3.13X).

GROWTH RATES

There are no significant differences between Exterran’s longer term growth and growth in recent years.
Exterran’s historical income statement growth has been lower than balance sheet growth. Revenue growth has fallen short of asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been -11.5% per year.

Total asset growth has been -6.2% per year.

Annual E.P.S. growth has been -69.5% per year.

Equity growth has been -18.3% per year.
No consensus growth rate forecast is available for Exterran.
out_growthgrf#72716.jpg

Relative to the Exterran Corp Peer Group, Exterran’s historical growth measures are consistently lower quartile. Revenue growth (-11.5%) has been lower quartile. Total asset growth (-6.2%) has been lower quartile. E.P.S. growth (-69.5%) has been lower quartile. Equity growth (-18.3%) has been lower quartile.

Consensus growth forecast is unavailable.
out_growthgrf.2#72716.jpg

PRICE HISTORY

Over the full time period, Exterran’s stock price performance has been highly stable and significantly below market. Between November, 2015 and August, 2019, Exterran’s stock price fell -35%; relative to the market, this was a -54% loss. Significant price moves during the period: 1) October, 2017 – August, 2019: -67%; and 2) May, 2016 – October, 2017: +158%.
out_price#72716.jpg

TOTAL INVESTMENT RETURNS

Current annual total return performance of -50.8% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through July, 2019 of -50.8% is lower quartile relative to Exterran Corp Peer Group.

Current 5-year total return performance is not available.
out_quartret#72716.jpg

VALUATION BENCHMARKS

Relative to S&P 500 Composite, EXTN’s overall valuation is low. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is near the lower quartile. Ratio of enterprise value/assets is lower quartile. Price/equity ratio is lower quartile. Ratio of enterprise value/revenue is lower quartile. Price/earnings ratio is unavailable.
out_tradv#72716.jpg

Exterran has a major value gap compared to the median. For EXTN to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.60X to 1.10X. If EXTN’s ratio of enterprise value/revenue were to rise to 1.10X, its stock price would be higher by $19 to $30.
For EXTN to achieve upper quartile valuation relative to the Exterran Corp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.60X to 1.70X. If EXTN’s ratio of enterprise value/revenue were to rise to 1.70X, its stock price would increase by $42 from the current level of $11.

VALUE TARGETS

EXTN’s future returns on capital are forecasted to fall short of the cost of capital. Accordingly, the company is expected to be a modest Value Eraser.
Exterran’s current Price Target of $13 represents a +23% change from the current price of $10.56.
This neutral appreciation potential results in an appreciation score of 52 (48% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 52, the low Power Rating of 1 results in an Value Trend Rating of F.
out_vc#72716.jpg

Exterran’s current Price Target is $13 (-51% from the 2018 Target of $26 but +23% from the 08/21/19 price of $10.56). This dramatic fall in the Target is the result of a +4% increase in the equity base and a -52% decrease in the price/equity multiple. The forecasted decline in return on equity has a very large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a large negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a large positive impact.
out_wc.1#72716.jpg
out_wc.2#72716.jpg

PTR’s return on equity forecast is 4.5% — slightly below our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2013 and 2018. The current forecast is steady at the 2013 peak of 6%.

PTR’s growth forecast is 4.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, steady decline between 2013 and 2018. The current forecast is steady at the 2014 peak of 4%.

PTR’s cost of equity forecast is 5.6% — in line with recent levels. Forecasted cost of equity exhibited a modest, steady decline between 2013 and 2018. The current forecast is steady at the 2013 peak of 5.5%.
out_vc.2#72716.jpg
At Exterran’s current price of $10.56, investors are placing a negative value of $-14 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 1.0% per year, and a return on equity of 8.0% versus a cost of equity of 5.0%.
PTR’s 2020 Price Target of $13 is based on these forecasts and reflects an estimated value of existing assets of $14 and a value of future investments of $-1.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

Be the first to comment

Leave a Reply

Your email address will not be published.


*


This site uses Akismet to reduce spam. Learn how your comment data is processed.