Small Cap Stocks

A day ago, T-3 Energy (TTES – first recommended at $12.13), reported financial results which handily beat Wall Street estimates. The company’s bottom-line jumped 50% year-over-year to $0.60 per share, on a 36% increase in revenue.

These results beat the high-end estimate from Bear, Stearns of $0.55 per share. For the full 2007 year, Bear now expects TTES to earn $2.35 per share. The analyst over at Pritchard Capital has the company earning $2.40 per share in 2007.

Interestingly, despite the continued strong results from TTES and the company’s solid growth opportunities, the stock still trades at a discount to its peer group. As we have noted in the past, this discount is probably related to the fact the company has only recently become attractive to institutions following a secondary back in April which shed the huge ownership position which First Reserve Fund had in TTES. As such, it is still taking some time for the company to market itself to Wall Street.

Nevertheless, the stock has performed very well this year, and is up about 45% since we reiterated a buy on the stock in April. Despite the solid gains, we still recommend holding onto the shares, as we think that with time, assuming continued positive earnings suprises, the stock will trade at a premium to its peers, given the company’s higher growth rate and more substantial expansion opportunities.
The comments from the Pritchard analyst sums up the situation pretty well:

“With a $500 million universal shelf, an un-drawn credit facility and a debt free balance sheet, TTES has the ability to fund substantially higher growth than we are assuming. We believe that a $6/share number is achievable long term if the company is successful in penetrating the wellhead market with the same success it has done in the BOP business. Acquisition growth could make that estimate low as well. “

Disclaimer: We own shares in TTES. This site may include market analysis and we may own shares in the stocks mentioned in our reports. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

As we predicted here earlier this month, in our piece, Will TTES’s Secondary Unlock Value, Wall Street research firms are finally beginning to market this fast-growing oil services company, following the recent completion of the sale of all of First Reserve’s shares to institutional investors. This morning Bear, Stearns, initiated coverage of TTES with an outperform rating and a $32 price target.

In the report, Bear Stearns call attention to:

If you’ve been a regular reader of this blog, you’ll know that one of the oilfield services stocks we’ve liked for quite some time is TTES. You can read our past analyses, by clicking here.

Our last post on the stock, was nearly a year ago, and we think it’s finally time for an update, since bullish speculation in the shares could heat up in the coming months.

Why is that? Well TTES is back in the secondary game at a very opportune time. Read the press release here.

Previously, we became bearish on the company whenever they attempted this type of secondary. But this time, the situation is quite different, primarily because one of TTES’s larger competitors, HYDL recently received a buyout offer by Tenaris at a huge premium. The purchase price for HYDL was nearly 14X EV/ 2006 EBTIDA and 25X 2006 EPS.

TTES is currently trading at about $24, giving it a valuation of about 8X EV/2006 EBITDA and 16X 2006 fully diluted EPS. TTES’s valuation has historically been depressed due to the huge ownership position by First Reserve Fund. However, with the HYDL takeover, it seems to us that TTES will have no trouble placing the secondary this time around and completely eliminating the First Reserve position in the stock.

Once First Reserve is gone and the shareholder base is more diverse, it seems to us that TTES will get a valuation on par with current industry multiples, such as given to HYDL in the recent takeover. The trigger for a higher price, could be coverage by Wall Street. Not one Wall Street analyst follows TTES right now, but that could change soon. Bear Stearns is the lead underwriter for the current secondary. We think Wall Street analysts could easily justify a $40 stock price for TTES, based on the current outlook.

As for downside risk, we think it’s limited here given the M&A in TTES’s sector and given the company’s strong business outlook. Of course, there is always the proverbial oil commodity risk, but are lower oil prices really a risk at this point with summer driving season just a few months away? The stock may prove volatile until the secondary is placed, but thereafter it should begin to trade normally and the valuation could rise substantially.

Disclaimer:

We own shares in TTES. This site may include market analysis and we may own shares in the stocks mentioned in our reports. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

With the release of today´s bullish news by T-3 Energy Services (TTES), it now becomes understandable why the stock has performed strongly thus far in 2006. It also explains why insiders recently excercised options at about $11.40 per share. Bottom-line: Hold on to TTES thru 2006 and buy on dips. With a tiny share float and exposure to one of the hottest sectors, oilfield services, it should be a wild ride.

TTES out with a 10Q tonight. Stock was down big today. Clearly, somebody knew about earnings and sold beforehand. But, I didn´t see much in the financial report that changes anything as it relates to the stock, and there is no reason to sell now. However, there are two non-financial items that are worth noting.