Saturday, February 11, 2006

Grant Prideco Inc (GRP) Analysis

Recently, there was interest in GRP as many analysts upgraded this stock and this stock was also mentioned in CNBC as a strong buy. Let us look at this company and its financials to see if this is a buy.

First an introduction to the company's business. There is no better place to look than the company's 10-K or 10-Q. In one sentence, GRP business can be described as "GRP is a world leader in drill stem technology development and drill pipe manufacturing, sales and service; a global leader in drill bit technology, manufacturing, sales and service; and a leading provider of high-performance engineered connections and premium tubular products and services".

GRP's business is primarily dependent on the level of oil and gas drilling activity worldwide. This in turn, depends on the level of capital spending by major, independent and state-owned exploration and production companies.

This clearly shows in the company's share price as the stock jumped from $20 in January to $45 on Feb 10th. The current P/E is 31. Let us take a look at the balance sheets to see if the stock price jump is because of P/E expansion or significant improvement in the stock fundamentals.

Year over year, revenues increased by 45%. The operating income jumped by 146% as the cost of sales and marketing remained the same year over year. There was also a refinancing charge of 57 million dollars and equity income of 38 million in 2005. These charges werent present in 2004. From the latest 10-Q, the stocks diluted by about 4% year over year.

On a positive note, the long term debt declined by 100 million. The company's profitability is based on the rig count in general. The company owns more rigs in the U.S compared to the rest of the world. The number of rigs in the U.S increased by 27% while the international rigs increased by 7.6%. The company is also forecasting a strong 2005, as noted in the 10-Q.

"When forecasting our results for the remainder of 2005, we relied on assumptions about the market, customers, and suppliers, and we also considered the Company’s results and backlog from the first three quarters of 2005. All these indicators appear strong. We anticipate commodity price strength for the foreseeable future driven by strong worldwide demand. Improving pricing, profitability and outlook of our customers should translate into a continuation of strong worldwide drilling activity levels through year-end. Also, in Canada, the seasonal drilling activity increase should be accompanied by a shift toward more complex drilling in the North, which should incrementally help our drill bit product mix. Finally, our backlog is at record levels. At September 30, 2005, our total backlog was $742.5 million, up $450.6 million from December 31, 2004. This is the highest backlog level since the Company became public in April 2000. Using these indicators, we anticipate that fourth quarter earnings will be another record, in the range of $0.50 to 0.52 per share. This should bring earnings for the full year to be in the range of $1.35 to $1.37 per share, including refinancing charges."

The company has beat its own expectations by seven cents and it beat its own expectations on the high end with earnings coming in at 1.45/share. The company had a great run in 2005 and the company's exposure is mostly in north america. (U.S and Canada). The stock doubled in January and I would wait for the 10-Q/10-K to come out for the entire year before jumping into this stock.

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