Forum Energy Gearing to Explode

NEW YORK (TheStreet) -- With ongoing improvements in global energy spending, which has sent shares of Weatherford International (WFT) and National Oilwell Varco (NOV) to new 52-week highs, it's a little surprising that Forum Energy Technologies (FET) stock has been left out of the Street's "energy fest."

While Forum Energy has posted year-to-date gains of 16%, the stock has gone nowhere in eight months. Investors are unsure of what to make of the company's entry into an already-crowded space of energy equipment manufacturers. Not only does Forum Energy face an uphill battle with the likes of Cameron International (CAM), but after some recent acquisitions, General Electric (GE) has turned itself into a formidable rival in subsea and surface equipment.

Consequently, Forum Energy, which entered the scene with a promising IPO in April of last year, has struggled to earn the Street's trust. Forum Energy does have a significant amount of debt, which management used to finance the company's roll-up strategy. But with aggressive plans to become a "total solutions provider," Forum Energy, which is growing at a 22% rate while building a strong presence in international markets, looks like a good name for investors looking for exposure in the energy space.

I was a bit concerned ahead of the Forum Energy's third-quarter earnings results, though not because I doubted the ongoing recovery in energy equipment orders. But it did concern me that Cameron and National Oilwell, which posted stronger-than-expected results, had taken business away from Forum Energy. But with Forum Energy posting a $45 million increase from the year-ago quarter in drilling and subsea revenue, that was not the case.

Here was a perfect example of how the Street continues to doubt this company. As noted, while Forum Energy's debt continues to be a popular cited bear argument, it needs to be discussed in the context of what these debts have produced, including the company's six acquisitions that were completed in the trailing twelve months.

Although these deals caused some anxieties, and were once perceived as "frivolous," it was these transactions that -- when combined -- helped the company generate a 22% increase in third-quarter revenue. What's more, investors have to be encouraged by the progress management continues to make in international markets, especially in segments like the subsea technologies business and remotely operated vehicles.

The other aspect of this operation which should continue the uptrend in the share price is that management has spoken about transitioning drilling capital equipment to the international side as it looks to further diversify the business. These are strategies that have worked at energy servicers like Baker Hughes (BHI) and Halliburton (HAL). And I believe Forum Energy, which continues to enjoy better-than-expected demand for business in fracturing plugs and downhole protection systems, is feared for the wrong reasons.

I won't pretend that the decline in North American land rig count was not meaningful. Again, this is where management's diversification strategies and the strong international performance presents the sort of offsetting advantages for which would be praised in more "mature companies" like Cameron or National Oilwell.

In that regard, I don't believe Forum Energy gets the sort of pass that other strong-growing companies have received. It's true that margins have not been extraordinary, but management has restructuring plans in place to improve both operating margins and revenue. It's also worth noting that, unlike the April and July quarters, the Drilling & Subsea segment showed strong improvement this quarter in operating margin, which suggests that things are starting to move in the right direction.

This was a strong quarter from an up-and-coming player in an energy equipment industry that is still in recovery mode. Given that the stock has flat-lined over the past eight months, I believe it's only a matter of time before the Street wakes up Forum Energy, which is still cheap while trading at only 14 times 2014 estimates. On the basis of continued international growth and strong orders, fair-market value should reach $35 per share over the next 12 to 18 months.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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