Forum Energy Not Losing Steam

NEW YORK (TheStreet) -- In the larger context of offshore energy equipment companies, Forum Energy Technologies (FET) has been a notable underperformer. At least that's how it is being perceived.

I say "perceived" because Forum Energy's absolute results have held up pretty well compared to, say, Cameron International (CAM) and FMC Technologies (FTI). Fairly or unfairly, Forum Energy just doesn't command the same respect. This is despite posting a string of earnings beats. But that's all about to change.

With ongoing improvements in global energy spending, which has compelled General Electric (GE) to buy into subsea and surface equipment, Forum Energy management has developed an aggressive plan to turn the company into one-stop-shop energy provider. This makes sense, given how crowded the space has now become.

The thing is, these projects come at cost. So investors are unsure of what to make of the company's promises. They've taken a wait-and-see attitude, which is why the stock has been range-bound over the past twelve months. The company has incurred some debt, yes. But it's manageable and doesn't portend the "uphill battle" some analysts are making it out to be.

Despite some recent obstacles, Forum Energy is still growing revenue at a 22% rate. And this is while also building a strong presence in international markets. What's more, with these stocks trading off of order growth, it's still a little surprising that Forum Energy trades at a price-to-earnings ratios that is 2 points and 7 points below Cameron and FMC, respectively.

In the October quarter, for instance, there were concerns that Cameron and National Oilwell Varco (NOV), both of which posted stronger-than-expected results, had taken business away from Forum Energy. That was not the case. Forum Energy posted a year-over-year increase in drilling and subsea revenue of $45 million.

Plus, the $354 million in total orders was consistent with orders in July quarter. Digging deeper into the numbers, investors would realize that bookings, in fact, had increased. Yet, I've read that weak bookings cited as cause for the stock's lack of movement. And there was also increased demand for drilling capital equipment, well construction and completion products.

The October quarter also revealed a book-to-bill ratio of 91% for the company as a whole. In other words, this is the proportion of orders Forum Energy received to what the company was able to deliver during the quarter.

This means demand was strong across the board. Not to mention, book-to-bill ratio for production and infrastructure came in at 85% and 94% for drilling at subsea. (For some context, a book-to-bill ratio above 1% is considered good.) It's only a matter of time before the Street realizes how undervalued Forum Energy is.


Clearly, I like this company. And as excited as the Street should be with Forum Energy's potential in terms of long-term order growth, revenue, margin, there are still execution risks here. And this is pretty much the narrative within the entire sector. The difference is, unlike several of its peers, Forum Energy's valuation offsets some of that risk.

On Friday, the company will report its fourth-quarter and full-year earnings results. The Street will be looking for earnings of 40 cents per share on revenue of $399.5 million, which would represent a year-over-year revenue growth of 21%. I wouldn't get too excited by that revenue number, though. Having traded for less than two years as a public company, Forum Energy is still young.

In this case, investors should be focused on the bottom line. And if the company does meet or exceed 40 cents per share, this means profits would have jumped more than 50% year-over-year. It would also indicate that management's recent plans to improve both operating margins and revenue are working.

The strong jump in profits should help pay down some debts, which management used to finance the company's roll-up strategy, including the company's six acquisitions completed in the trailing twelve months.

In many respects, Forum Energy's debt of more than half a billion dollars (which financed its aggressive growth plan) is what has kept most investors at bay. It's a legitimate concern, but it's manageable. And this quarter's profits should demonstrate how cheap this stock is. Fair-market value should reach $35 per share over the next 12 to 18 months on the basis of continued international growth and strong orders.

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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