Rating Update: Stock Rating C-Low Neutral (12/6/19)-Natural Gas Services Group Inc. (NGS).

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BUSINESS

Natural Gas Services Group, Inc. provides gas compression equipment and services to the natural gas and oil industry in the United States. The company engages in the rental of small to medium horsepower compression equipment to non-conventional natural gas and oil production businesses. As of December 31, 2017, it had 2,546 natural gas compressors in its rental fleet totaling 369,961 horsepower. The company also assembles compressor components into compressor units for rent or sale; engineers and fabricates natural gas compressors; and designs and manufactures a line of reciprocating compressor frames, cylinders, and parts.
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INVESTMENT RATING

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NGS’ 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.

Natural Gas Services has a current Value Trend Rating of C (Low Neutral).
The Value Trend Rating reflects contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. Natural Gas Services has a slightly positive Appreciation Score of 68 but a poor Power Rating of 23, producing the Low Neutral Value Trend Rating.

Natural Gas Services’ stock is selling well below targeted value. The current stock price of $11.50 compares to targeted value 12 months forward of $17.
This moderately high appreciation potential results in an appreciation score of 68 (only 32% of the universe has greater appreciation potential.)
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Natural Gas Services has a Power Rating of 23. (This poor Power Rating indicates that NGS only has a better chance of achieving attractive investment performance over the near to intermediate term than 23% of companies in the universe.)
Factors contributing to this poor Power Rating include: recent price action has been unfavorable; and is currently in an unfavorable positi. An offsetting factor is the recent trend in NGS’ earnings estimates has been favorable.

INVESTMENT PROFILE

NGS’ financial strength is low. Financial strength rating is 16.
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Relative to the S&P 500 Composite, Natural Gas Services Group Inc. has significant Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that NGS is higher risk. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, low historical growth, and high earnings variability. NGS’ valuation is high: low dividend yield, high P/E ratio, and low price/book ratio. NGS has unusually low market capitalization.

CURRENT SIGNALS

Natural Gas Services’ current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.

Natural Gas Services’ current technical position is very weak. The stock price is in a 2.3 month down move. The stock has declined 18.0% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

. Positive developments: the consensus estimate for December, 2020 increased significantly, and the consensus estimate for December, 2019 increased significantly. Negative developments: significant quarterly sales deceleration occurred, and significant quarterly earnings deceleration occurred.
The stock is currently rated C.
Natural Gas Services Group Inc. (NYSE: NGS) stock suffered a major decline of -15.5% on 12/6/19. The shares closed at $0.02. Trading volume in this decline was normal. The stock has been extremely weak relative to the market over the last nine months but has risen 4.5% during the last week.

CASH FLOW

In 2018, Natural Gas Services experienced a significant decline in cash of -$16.58 million (-24%). Sources of cash were lower than uses. Cash generated from 2018 EBITDA totalled +$22.69 million. Non-operating sources contributed +$0.18 million (+1% of EBITDA). Cash taxes consumed -$0.33 million (-1% of EBITDA). Re-investment in the business amounted to -$41.49 million (-183% of EBITDA). On a net basis, debt investors pulled out -$0.07 million (-0% of EBITDA) while equity investors furnished +$2.44 million (+11% of EBITDA).
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NGS’ Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Natural Gas Services Group Inc. Peer Group. (Since 2015 Non-operating Income, %EBITDA has experienced sharp improvement.) In most years, Natural Gas Services was in the second quartile. Currently, Natural Gas Services is above median at +1% of EBITDA (+$0.18 million).

NGS’ Cash Taxes, %EBITDA has experienced a small downtrend over the period. This downtrend was accompanied by an opposite trend for the Natural Gas Services Group Inc. Peer Group. (Since 2015 Cash Taxes, %EBITDA has experienced a very sharp recovery.) In most years, Natural Gas Services was in the second quartile and top quartile. Currently, Natural Gas Services is upper quartile at -1% of EBITDA (-$0.33 million).

NGS’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Natural Gas Services Group Inc. Peer Group. (Since 2016 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Natural Gas Services was in the third quartile and second quartile. Currently, Natural Gas Services is substantially below median at -183% of EBITDA (-$41.49 million).

NGS’ Debt Investors, %EBITDA has experienced a strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Natural Gas Services Group Inc. Peer Group. (Since 2016 Debt Investors, %EBITDA has recently stabilized.) In most years, Natural Gas Services was in the second quartile and third quartile. Currently, Natural Gas Services is above median at -0% of EBITDA (-$0.07 million).

NGS’ Equity Investors, %EBITDA has exhibited a very small overall uptrend over the period. This improvement was accompanied by an opposite trend for the Natural Gas Services Group Inc. Peer Group. In most years, Natural Gas Services was in the third quartile and second quartile. Currently, Natural Gas Services is below median at +11% of EBITDA (+$2.44 million).

NGS’ Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Natural Gas Services Group Inc. Peer Group. (Since 2016 Change in Cash, %EBITDA has accelerated very sharply.) In most years, Natural Gas Services was in the top quartile and third quartile. Currently, Natural Gas Services is lower quartile at -73% of EBITDA (-$16.58 million).
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NGS’ Cash, %Revenue has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by stability for the Natural Gas Services Group Inc. Peer Group. In most years, Natural Gas Services was in the third quartile and top quartile. Currently, Natural Gas Services is at the upper quartile at +80%.

PROFITABILITY

NGS’ return on equity has eroded very significantly since 2009 accelerating very sharply after the 2017 level.
This very significant erosion was due to very strong negative trend in pretax operating return offset by very strong positive trend in non-operating factors.
The productivity of NGS’ assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend that accelerated very sharply from the 2013 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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NGS’ return on equity is lower quartile (-4.6%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is lower quartile (-4.1%) reflecting asset turnover that is below median (0.25X) and lower quartile pretax margin (-16.2%).
Tax “keep” rate (income tax management) is substantially above median (95.3%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is at the lower quartile (1.19X).

GROWTH RATES

There are no significant differences between Natural Gas Services Group I’s longer term growth and growth in recent years.
Natural Gas Services Group I’s historical income statement and balance sheet growth are not available.

Annual revenue growth has been -0.0% per year.

Total asset growth has been 4.5% per year.

Annual E.P.S. growth has been -15.0% per year.

Equity growth has been 5.8% per year.
No consensus growth rate forecast is available for Natural Gas Services Group I.
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Relative to the Natural Gas Services Group Inc. Peer Group, Natural Gas Services’ historical growth measures are erratic. Revenue growth (-0.0%) has been slightly above median. Equity growth (5.8%) has been at median. E.P.S. growth (-15.0%) has been substantially below median. Total asset growth (4.5%) has been slightly below median.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Natural Gas Services Group’s stock price performance has been variable and significantly below market. Between March, 2009 and December, 2019, Natural Gas Services Group’s stock price rose +28%; relative to the market, this was a -68% loss. Significant price moves during the period: 1) September, 2017 – December, 2019: -60%; 2) September, 2011 – June, 2014: +158%; and 3) March, 2009 – December, 2009: +109%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -38.4% 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 October, 2019 of -38.4% is lower quartile relative to Natural Gas Services Group Inc. Peer Group.

Current 5-year total return performance of -14.3% is lower quartile relative to the S&P 500 Composite.
Through October, 2019, with lower quartile current 5-year total return of -14.3% relative to S&P 500 Composite, Natural Gas Services’ total return performance is lower quartile relative to Natural Gas Services Group Inc. Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, NGS’ overall valuation is normal. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is upper quartile. Ratio of enterprise value/revenue is near the lower quartile. Ratio of enterprise value/assets is lower quartile. Price/equity ratio is lower quartile. Price/earnings ratio is unavailable.

Relative to Natural Gas Services Group Inc. Peer Group, NGS’ overall valuation is normal. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is above median. Ratio of enterprise value/revenue is at the lower quartile. Ratio of enterprise value/assets is at the lower quartile. Price/equity ratio is lower quartile. Price/earnings ratio is unavailable.
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Natural Gas Services has a large value gap compared to the median. For NGS to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.82X to 2.18X. If NGS’ ratio of enterprise value/revenue were to rise to 2.18X, its stock price would be higher by $2 to $14.
For NGS to achieve upper quartile valuation relative to the Natural Gas Services Group Inc. Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.82X to 3.71X. If NGS’ ratio of enterprise value/revenue were to rise to 3.71X, its stock price would increase by $10 from the current level of $12.

VALUE TARGETS

NGS’ 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.
Natural Gas Services Group’s current Price Target of $17 represents a +52% change from the current price of $11.50.
This moderately high appreciation potential results in an appreciation score of 68 (only 32% of the universe has greater appreciation potential.)
Notwithstanding this moderately high Appreciation Score of 68, the low Power Rating of 23 results in an Value Trend Rating of C.
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Natural Gas Services Group’s current Price Target is $17 (-13% from the 2018 Target of $20 but +52% from the 12/06/19 price of $11.50). This slight fall in the Target is the result of a +7% increase in the equity base and a -19% decrease in the price/equity multiple. Each of the Value Drivers contributed to this decline in the price/equity multiple. The forecasted decline in return on equity has a large negative impact on the multiple. The forecasted increase in cost of equity also has a slight negative impact as did the increase in growth.
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PTR’s return on equity forecast is 2.1% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2010 and 2018. The current forecast is well below the 2013 peak of 8%.

PTR’s growth forecast is 5.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, variable decline between 2010 and 2018. The current forecast is well below the 2014 peak of 12%.

PTR’s cost of equity forecast is 4.3% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2010 and 2018. The current forecast is steady at the 2013 peak of 6.0%.
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At Natural Gas Services Group’s current price of $11.50, investors are placing a negative value of $-9 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 2.0% per year, and a return on equity of 4.0% versus a cost of equity of 4.0%.
PTR’s 2020 Price Target of $17 is based on these forecasts and reflects an estimated value of existing assets of $19 and a value of future investments of $-2.

About John Lafferty 58188 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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