GRP Revisited

We looked at GRP a few months back. The company's stock price had almost doubled then based on strong earnings. The company continued to do well after the first quarter earnings were released. Let us revisit this company to see how the fundamentals look like.

From the 10-Q of GRP gives an overview of why GRP is ticking.

Our business primarily depends on the level of worldwide oil and gas drilling activity, which depends on capital spending by major, independent and state-owned exploration and production companies. Those companies adjust capital spending according to their expectations for oil and gas prices, which creates cycles in drilling activity. Each of our business segments generally tracks the level of domestic and international drilling activity, but their revenues, cash flows and profitability follow the rig count at different stages within these market cycles. Drill pipe demand is also a function of customer inventory levels and typically lags changes in the worldwide rig count. In a rising market, this results in longer lead times for ordered products. In a declining market, customers are contractually required to purchase ordered drill pipe even if they will no longer need that pipe. This creates a situation where some customers have an inventory of excess drill pipe. Drill bit demand and this segment’s earnings and cash flows have closely tracked the worldwide rig count. Within our Tubular Technology and Services segment, there are four product lines: Atlas Bradford premium connections, Tube-Alloy accessories, TCA premium casing and XL Systems large bore connections and services. Results for this segment’s Atlas Bradford, Tube-Alloy and TCA product lines predominantly follow changes in premium tubular markets, including North American offshore drilling (in particular, the Gulf of Mexico) and deep U.S. gas drilling, but short-term demand for Atlas Bradford products also can be affected by inventories at OCTG distributors. The TCA product line also is affected by the level of U.S. OCTG mill activity. This segment’s XL Systems product line generally follows the level of worldwide offshore drilling activity.

The management sees a strong 2006 with earnings in the 2.4 to 2.6 dollar per share range. The management has been typically been conservative in the past with its predictions and has beaten its own expectations for the most part. Even if the P/E contracts to 20 from the current 26, the company has an upside of about 10% from the current price levels if we go with the high end of the management's forecast for yearly earnings. If the P/E remains at 25, the upside is close to 40%.

The analysts consensus is for the the company to earn 2.87 dollars/share. If this holds true, the company has a potential upside of upto 50% from its current price levels. The company is expected to grow at a fast pace through 2007 as well.

The balance sheets look ok. The only concern is that year over year share holders equity increasing by 15% which is far lower than the EPS growth. The book value of the company is around 8.4 dollars/share. The cash flows from operating activities increased by 72% in 2005 compared to 2004 and this does look healthy.