Dril-Quip Reports Powerful Q4 EPS And Very Strong Backlog

Oil and gas equipment provider Dril-Quip (DRQ) easily beat Q4 estimates by $0.07/share and reported a very strong 2013 year-end backlog of $1.2 billion. As a result, the stock is currently trading up over $10/share. This comes after a recent sell-off that sent DRQ significantly under the $100 level. Despite today's big rally, the stock has more room to run as the earnings growth story for this stock is far from over.

DRQ is funny about their quarterly earnings reports - you never know quite when to expect them to be released. However, as long as the company keeps growing revenue and earnings the way it has - who cares? The Q4 earnings summary is shown below:

Dril-Quip, Inc.
Comparative Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
	Three months ended December 31,					Year ended December 31
	2013		2012			2013			2012
Revenues	$ 232,462		$ 188,477			$ 872,372			$ 733,031
Cost and expenses:
Cost of sales	132,244		114,470			513,906			451,666
Selling, general and administrative	26,074		23,604			94,806			82,218
Engineering and product development:	10,976		8,815			40,115			37,455
	169,294		146,889			648,827			571,339
Operating Income.	63,168		41,588			223,545			161,692
Interest income	101		133			587			462
Interest expense	(11)		(11)			(35)			(32)
Income before income taxes	63,258		41,710			224,097			162,122
Income tax provision	16,195		10,758			54,270			42,913
Net income	$ 47,063		$ 30,952			$169,827			$119,209
Diluted earnings per share	$ 1.15		$ 0.76			$ 4.16			$ 2.94
Weighted average shares-diluted	40,998		40,644			40,865			40,523
Depreciation and amortization	$ 7,623		$ 6,814			$ 29,340			$ 26,224
Capital expenditures	$ 12,596		$ 10,167			$ 42,633			$ 50,773

Q4 net income of $47.1 million, or $1.15/share compared to $31.0 million, or $0.76/share for Q4 2012 (up 51%). And that was after fourth quarter 2013 after-tax foreign exchange loss of $2.3 million ($0.06/share), as compared to an after-tax foreign exchange loss of only $0.02/share in Q4 of 2012.

Total revenues quarter over quarter grew ~23%. The increase in revenues resulted from increased product revenues of $40.5 million and increased service revenues of $3.5 million.

For the full year, net income was $4.16/share compared with net income of $2.94/share for full year 2012 (up 42%). Total revenues for the year were $872.4 million, compared to $733.0 million for 2012, an increase of ~19%. Notice the increase in sales was achieved despite ~$8 million less in capital expenditures.

Backlog & 2014 Guidance

The 2013 year-end backlog at was ~$1.2 billion compared to its 2012 backlog of ~$881 million (up 36%). The Company expects its earnings per diluted share for 2014 to be in the range of $5.00-$5.20 and its 2014 first quarter earnings per diluted share to approximate $1.10-$1.20. The midpoint of the 2014 net earnings/share yearly guidance ($5.10) would be an increase of 23% over 2013's $4.16.

As I reported in my last article on DRQ, the midpoint of Q4 guidance was $4.15, and I predicted $4.20. So the company beat its own guidance by a penny/share and my estimate was $0.04 over. I am not complaining. However, my 2014 estimate of $5.80/share may be bullish compared to the current midpoint of guidance ($5.10). That said, DRQ did raise guidance twice in 2013, so perhaps we will see similar action this year.

In a BofA presentation last November (available here), DRQ showed a bullish outlook for the estimated worldwide floating rig fleet. The information was based on data from independent source IHS Petrodata.

(click to enlarge)

So this, along with continued growth in the subsea tree market, is what is powering DRQ's growth in sales and backlog. However, the real reason to own DRQ is its manufacturing expertise (which I explained in the earlier article). This expertise is delivering superior margins in comparisons to the peer group and puts DRQ in the competitive driver's seat:

(click to enlarge)

Summary & Conclusion

If you have to own only one oil and gas equipment manufacturer, I would be hard-pressed to find a company better than Dril-Quip. These guys deliver. So despite the big rally today (now up over $11 as I write this), the stock is still not expensive in my opinion. If the company hits the midpoint of its 2014 net income guidance ($5.10), the PE based on the current price ($107.60) is only 21. That's very inexpensive for a company that just grew its annual net income per share by 42%. Expect DRQ to (at a minimum) touch its 2013 high ($121/share) during the first 6 months of 2014.

DRQ is a STRONG BUY.

(click to enlarge)

Source: Dril-Quip Reports Powerful Q4 EPS And Very Strong Backlog

Disclosure: I am long DRQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Additional disclosure: I am an engineer, not a CFA. The information and data presented in this article was obtained from company documents and/or sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for investment decisions you make. Thanks for reading and good luck!

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