Rating Update: Stock Rating F-Lowest (10/29/19)-Exterran Corp (EXTN).

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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.
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INVESTMENT RATING

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

Exterran has a current Value Trend Rating of F (Lowest Rating).
The Value Trend Rating reflects inconsistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Exterran has a neutral Appreciation Score of 44 but a very low Power Rating of 4, with the Lowest Value Trend Rating the result.

Exterran’s stock is selling at targeted value. The current stock price of $12.74 compares to targeted value 12 months forward of $13.
This neutral appreciation potential results in an appreciation score of 44 (56% of the universe has greater appreciation potential.)
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Exterran has a Power Rating of 4. (EXTN’s very low Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 4% 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 unfavorable; and is currently in an unfavorable positi.

INVESTMENT PROFILE

Exterran’s financial strength is average. Financial strength rating is 43.
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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 mixed. The stock price is in a 1.2 month up move. The stock has appreciated 36.3% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Exterran Corp (NYSE: EXTN). Important positive changes in investment behavior have recently occurred: positive upside/downside volume developed.
Positive development: significant quarterly earnings acceleration occurred. Negative development: the consensus estimate for December, 2020 decreased significantly.
The stock is currently rated F.
Exterran Corp (NYSE: EXTN) stock closed at $0.54 on 10/29/19 after a major increase of 25.6%. However, this advance was accompanied by below average trading volume at 71% of normal. The stock has risen 1.7% during the last week but has been extremely weak relative to the market over the last nine months.

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 pulled out -$3.3 million (-2% of EBITDA) while equity investors withdrew -$2.4 million (-1% of EBITDA).
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Exterran’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend 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 top quartile. Currently, Exterran is substantially below median 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 top quartile. Currently, Exterran is upper quartile 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 lower 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 stability for the Exterran Corp Peer Group. In most years, Exterran was in the third quartile. Currently, Exterran is substantially below median at -15% of EBITDA (-$30.2 million).
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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 third quartile. Currently, Exterran is at the 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 significant analytical factor.
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.
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Exterran’s return on equity is substantially below median (-4.3%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is below median (1.3%) reflecting asset turnover that is at median (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 substantially below median.
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.
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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.
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PRICE HISTORY

Over the full time period, Exterran’s stock price performance has been highly stable and below market. Between November, 2015 and October, 2019, Exterran’s stock price fell -22%; relative to the market, this was a -47% loss. Significant price moves during the period: 1) October, 2017 – October, 2019: -61%; and 2) May, 2016 – October, 2017: +158%.
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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 September, 2019 of -50.8% is lower quartile relative to Exterran Corp Peer Group.

Current 5-year total return performance is not available.
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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 below median. 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.
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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 0.66X to 1.34X. If EXTN’s ratio of enterprise value/revenue were to rise to 1.34X, its stock price would be higher by $27 to $40.
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 0.66X to 1.76X. If EXTN’s ratio of enterprise value/revenue were to rise to 1.76X, its stock price would increase by $44 from the current level of $13.

VALUE TARGETS

EXTN’s future returns on capital are forecasted to be below the cost of capital. Accordingly, the company is expected to be a Value Eraser.
Exterran’s current Price Target of $13 is little changed from the current price of $12.74.
This neutral appreciation potential results in an appreciation score of 44 (56% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 44, the low Power Rating of 4 results in an Value Trend Rating of F.
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Exterran’s current Price Target is $13 (-51% from the 2018 Target of $26 but +2% from the 10/29/19 price of $12.74). 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 slight negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a large positive impact.
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PTR’s return on equity forecast is 1.9% — below our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2013 and 2018. The current forecast is below 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 5.5% — 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%.
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At Exterran’s current price of $12.74, investors are placing a negative value of $-12 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.

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