Dril-Quip Is Great, but So Are the Expectations

NEW YORK ( TheStreet) -- With the noticeable improvements in global energy spending, I've spent the past couple of weeks discussing the positive effects this has had on various oil/energy companies, like National Oilwell Varco ( NOV), whose stock has reached new highs on the prospects of improved business conditions.

What's more, that Anadarko (APC) has enjoyed above-average gains over the past couple of weeks, despite litigation concerns, suggests that the Street has already priced in a full-blown energy recover. While I've remained gun-shy about chasing these offshore drilling giants, Dril-Quip (DRQ), on the other hand, despite its year-to-date gains of 55%, still seems attractive to me. And it's probably the best oil services company you never heard of.

When factoring share-price gains of 160% over the past three years, if I'm ever pressured to pick one word to describe Dril-Quip, that word would be "great." But the company's greatness has only been matched by the Street's expectations.

Even so, the difference is, unlike many of its rivals, Dril-Quip management, which has already raised guidance multiple times this year, has always delivered. It's true that at a P/E of 30, which is 6 points higher than its five-year average, this stock is not cheap. But with stronger-than-expected demand coming in from offshore energy development, not to mention the stabilizing of oil and gas prices, I still see ample opportunities here for investors looking to play an energy rebound.

Given the third-quarter results seen from Cameron International (CAM), including a 13% increase in revenues, not to mention a 50% jump in its backlog, Dril-Quip investors feared that Cameron had stolen market share and were chewing their nails in anticipation of what management's results were going to reveal. But as Dril-Quip has been known to do, it outperformed by every statistical measure.

Third-quarter revenues were up 18% year over year to $225 million, which outperformed Cameron's revenue results by 5%. What really caught my attention, though, was the 54% year-over-year jump in Dril-Quip's backlog. Now, given that I cited Cameron's 50% backlog increase as a defense against a couple of bearish attacks, it's only fair that Dril-Quip's backlog outperformance supports a bullish outlook.

And let's not forget, there was a point when the Street had raised concerns about Dril-Quip's business immediately after General Electric's (GE), with its deep pockets, entered the subsea energy equipment space. But these results demonstrate that not only can Dril-Quip co-exist among the titans, but it can actually beat them at their own game. And this is while it does things differently.

One thing that I've always appreciated about this company is its capital-preservation strategies, which includes acquiring second-hand/refurbished equipment. This is in lieu of leveraging the company to a high annual expense budget. In other words, management has never been impressed by "shiny and new." Profits and operational efficiency has always remained the focus.

With profits soaring 35% year over year, that degree of fiscal awareness certainly helped during the third quarter. And seeing no slowdown on orders, the company also raised its full-year earnings-per-share guidance to a range of $4.10 to $4.20. When coupled with the strong backlog, it certainly seems as if management expects to dominate this sector for the foreseeable future. This -- in my opinion -- should make Dril-Quip an attractive acquisition candidate for both Cameron and GE.

Now I do want to keep things in proper context. I realize that I've "gushed" over this company quite a bit. But it's not because I'm discounting the risks that exists here. From a valuation perspective, as I've said, these shares are not cheap. And we must not discount the likelihood that the oil/energy sector may take a bad turn, which I believe is highly unlikely at this point.

Nevertheless, the Street is involved, we never want to assume anything, much less for a commodity company that is leveraged to the growth in offshore drilling in an unstable oil and gas industry. For now, Dril-Quip's reputation as a strong offshore driller continues to manifest itself in the company's results. And until I seen meaningful signs of business erosion and weak margins, I believe these shares should reach $130 in the next six to 12 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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