BUSINESS
Dril-Quip, Inc., together with its subsidiaries, designs, manufactures, sells, and services engineered drilling and production equipment for use in deepwater, harsh environment, and severe service applications worldwide. The company’s principal products include subsea and surface wellheads, subsea and surface production trees, mudline hanger systems, specialty connectors and associated pipes, drilling and production riser systems, liner hangers, wellhead connectors, diverters, and safety valves, as well as downhole tools.
INVESTMENT RATING
With future capital returns forecasted to be in line with the cost of capital, DRQ is expected to continue to be Value Creation neutral.
Dril-Quip has a current Value Trend Rating of D (Negative).
The Value Trend Rating reflects inconsistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Dril-Quip has a neutral Appreciation Score of 48 but a poor Power Rating of 26, leading to the Negative Value Trend Rating.
Dril-Quip’s stock is selling well below targeted value. The current stock price of $21.34 compares to targeted value 12 months forward of $27.
This neutral appreciation potential results in an appreciation score of 48 (52% of the universe has greater appreciation potential.)
Dril-Quip has a Power Rating of 26. (DRQ’s poor Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 26% of companies in the universe.)
Factors contributing to this poor Power Rating include: the trend in DRQ’s earnings estimates has been unfavorable in recent months; and recent price action has been unfavorable. An offsetting factor is the Oil & Gas Field Machinery, Equipment comparison group is currently in a modestly favorable position.
INVESTMENT PROFILE
Dril-Quip’s financial strength is below average. Financial strength rating is 31.
Relative to the S&P 500 Composite, Dril-Quip Inc. has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that DRQ is normal risk. Relative weaknesses include: low historical profitability, low financial strength, and low historical growth. Dril-Quip’s valuation is high: low dividend yield, high P/E ratio, and low price/book ratio. DRQ has unusually low market capitalization.
CURRENT SIGNALS
Dril-Quip’s current operations are eroding. Return on equity is falling, reflecting: and falling tax keep rate.
Dril-Quip’s current technical position is very weak. The stock price is in a 4.9 month down move. The stock has declined 24.5% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
Recent notable negative changes in fundamentals have affected Dril-Quip Inc. (NYSE: DRQ): the consensus estimate for December, 2024 decreased significantly, and significant quarterly earnings deceleration occurred.
In light of this new information we are reviewing our current Overall Rating of D. This review will be completed in the next several days.
Dril-Quip Inc. (NYSE: DRQ) has reported E.P.S. of $0.05 for its fourth fiscal quarter (ending December 31) versus $-0.01 for the same period a year ago. Relative to the consensus estimate of $0.18, this was a shortfall of $-0.13. For the latest four quarters through December 31, E.P.S. were $0.02 compared to $-0.05 a year ago.
Dril-Quip Inc. (NYSE: DRQ) stock closed at $21.34 on 2/26/24 after a modest gain of 0.4%. This advance was accompanied by normal trading volume. The stock has risen 0.5% during the last week but has been weak relative to the market over the last nine months.
CASH FLOW
In 2022, Dril-Quip experienced a significant decline in cash of -$58.41 million (-16%). Sources of cash were lower than uses. Cash generated from 2022 EBITDA totaled +$19.61 million. Non-operating sources contributed +$16.80 million (+86% of EBITDA). Cash taxes consumed -$6.50 million (-33% of EBITDA). Re-investment in the business amounted to -$65.08 million (-332% of EBITDA). On a net basis, debt investors removed -$0.61 million (-3% of EBITDA) while equity investors withdrew -$22.63 million (-115% of EBITDA).
Dril-Quip’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Dril-Quip Peer Group. In most years, Dril-Quip was in the top quartile and third quartile. Currently, Dril-Quip is upper quartile at +86% of EBITDA (+$16.80 million).
Dril-Quip’s Cash Taxes, %EBITDA enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Dril-Quip Peer Group. (Since 2020 Cash Taxes, %EBITDA has experienced a very sharp decline.) In most years, Dril-Quip was in the top quartile and lower quartile. Currently, Dril-Quip is lower quartile at -33% of EBITDA (-$6.50 million).
Dril-Quip’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Dril-Quip Peer Group. In most years, Dril-Quip was in the top quartile and lower quartile. Currently, Dril-Quip is lower quartile at -332% of EBITDA (-$65.08 million).
Dril-Quip’s Debt Investors, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Dril-Quip Peer Group. In most years, Dril-Quip was in the second quartile and third quartile. Currently, Dril-Quip is slightly above median at -3% of EBITDA (-$0.61 million).
Dril-Quip’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Dril-Quip Peer Group. In most years, Dril-Quip was in the lower quartile and third quartile. Currently, Dril-Quip is lower quartile at -115% of EBITDA (-$22.63 million).
Dril-Quip’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Dril-Quip Peer Group. In most years, Dril-Quip was in the third quartile and lower quartile. Currently, Dril-Quip is lower quartile at -298% of EBITDA (-$58.41 million).
Dril-Quip’s Cash, %Revenue has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Dril-Quip Peer Group. (Since 2017 Cash, %Revenue has experienced a sharp decline.) In most years, Dril-Quip was in the top quartile and second quartile. Currently, Dril-Quip is at the upper quartile at +82%.
PROFITABILITY
Dril-Quip’s return on equity has eroded very significantly since 2013. The current level is -0.2% versus the high of 13.7% and the low of -7.8%.
A major analytical focus for DRQ is a very strong negative trend in pretax operating return significantly augmented by a very strong negative trend in non-operating factors.
The productivity of Dril-Quip’s assets declined over the full period 2013-2023: asset turnover has suffered a very strong overall downtrend although it experienced a very sharp recovery after the 2020 low.
Reinforcing this trend, pretax margin experienced a strong overall downtrend even as it experienced a very sharp recovery after the 2021 low.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
Dril-Quip’s return on equity is slightly above median (-0.2%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is slightly above median (0.9%) reflecting asset turnover that is upper quartile (0.39X) and slightly above median pretax margin (2.2%).
Tax “keep” rate (income tax management) is lower quartile (-17.0%) resulting in after tax return on assets that is slightly above median.
Financial leverage (leverage) is lower quartile (1.16X).
GROWTH RATES
There are no significant differences between Dril-Quip’s longer term growth and growth in recent years.
Dril-Quip’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 -8.5% per year.
Total asset growth has been -2.9% per year.
Annual E.P.S. growth has been -54.1% per year.
Equity growth has been -3.0% per year.
No consensus growth rate forecast is available for Dril-Quip.
Relative to the Dril-Quip Peer Group, Dril-Quip’s historical growth measures are generally third quartile. Revenue growth (-8.5%) has been substantially below median. Total asset growth (-2.9%) has been substantially below median. Equity growth (-3.0%) has been below median. E.P.S. growth (-54.1%) has been lower quartile.
Consensus growth forecast is unavailable.
PRICE HISTORY
Over the full time period, Dril-Quip’s stock price performance has been variable and significantly below market. Between April, 2013 and February, 2024, Dril-Quip’s stock price fell -75%; relative to the market, this was a -92% loss. Significant price moves during the period: 1) July, 2019 – September, 2020: -53%; and 2) October, 2013 – October, 2016: -60%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -34.6% 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 January, 2024 of -34.6% is substantially below median relative to Dril-Quip Inc. Peer Group.
Current 5-year total return performance of -11.7% is lower quartile relative to the S&P 500 Composite.
Through January, 2024, with lower quartile current 5-year total return of -11.7% relative to S&P 500 Composite, Dril-Quip’s total return performance is below median relative to Dril-Quip Inc. Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, DRQ’s overall valuation is low. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Ratio of enterprise value/revenue is lower quartile. Ratio of enterprise value/assets is lower quartile. Price/equity ratio is lower quartile. Price/earnings ratio is unavailable.
Relative to Dril-Quip Peer Group, DRQ’s overall valuation is low. Ratio of enterprise value/assets is below median. Ratio of enterprise value/earnings before interest and taxes is below median. Price/equity ratio is below median. Ratio of enterprise value/revenue is lower quartile. Price/earnings ratio is unavailable.
Dril-Quip has a major value gap compared to the median. For DRQ to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.89X to 2.61X. If DRQ’s ratio of enterprise value/revenue were to rise to 2.61X, its stock price would be higher by $8 to $30.
For DRQ to achieve upper quartile valuation relative to the Dril-Quip Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.89X to 3.66X. If DRQ’s ratio of enterprise value/revenue were to rise to 3.66X, its stock price would increase by $20 from the current level of $21.
VALUE TARGETS
With future capital returns forecasted to be in line with the cost of capital, DRQ is expected to continue to be Value Creation neutral.
Dril-Quip’s current Price Target of $27 represents a +28% change from the current price of $21.34.
This neutral appreciation potential results in an appreciation score of 48 (52% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 48, the low Power Rating of 26 results in an Value Trend Rating of D.
Dril-Quip’s current Price Target is $27 (-11% from the 2022 Target of $31 but +28% from the 02/26/24 price of $21.34). This slight fall in the Target is the result of a -8% decrease in the equity base and a -4% decrease in the price/equity multiple. The forecasted flat return on equity has no impact on the price/equity multiple and the forecasted growth has no impact as well. More than offsetting these Drivers, the forecasted increase in cost of equity has a slight negative impact.
PTR’s return on equity forecast is 4.0% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2014 and 2022. The current forecast is significantly below the 2014 peak of 15%.
PTR’s growth forecast is 0.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, steady decline between 2014 and 2022. The current forecast is significantly below the 2014 peak of 12%.
PTR’s cost of equity forecast is 3.5% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, steady decline between 2014 and 2022. The current forecast is below the 2014 peak of 7.0%.
At Dril-Quip’s current price of $21.34, investors are placing a negative value of $-9 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 0.0% per year, and a return on equity of 4.0% versus a cost of equity of 3.4%.
PTR’s 2024 Price Target of $27 is based on these forecasts and reflects an estimated value of existing assets of $20 and a value of future investments of $8.
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