NEW YORK (TheStreet) -- Dresser-Rand Group (DRC) is tumbling on Tuesday after announcing plans to suspend operations at a plant in Spain due to proposed government regulation. Management also lowered its 2013 guidance.
By late morning, shares had taken off 8% to $54. Trading volume of 3.6 million was nearly five times its three-month daily average.
The company, which specializes in rotating heavy machinery equipment, said it intends to suspend work at its pig manure treatment facilities in Spain due to the potential implementation of regulation that would mean significantly reduced beneficial tariffs at its Spanish operations. The government has published a draft bill which would reduce tariffs by 37% retroactive to July 2013.
"In view of the pending change in the tariffs, the company has decided to suspend the operations at its six facilities, although discussions with the Spanish government are ongoing," Dresser-Rand said in a statement.
If the draft regulation is passed, the Olean, NY-based business would be required to reduce 2013 operating income by around $25 million due to retroactive tariff reductions and up to $50 million due to asset impairments.
The company also updated its preliminary guidance for its December-ended fourth quarter.
Operating income is expected to be lower than previous guidance of between $400 million and $440 million, as it was not able to sell three photovoltaic power plants to MBB Clean Energy as previously predicted. Also, the company was not able to recognize revenue in the fourth quarter on the shipment of equipment to Central Asia due to pending contractual matters. Combined, these two items will reduce 2013 operating income by around $19 million.
Further, the impact of proposed Spanish regulation will impact full-year operating income by up to $75 million. Operating income is now expected between $306 million and $316 million. Analysts surveyed by Thomson Reuters had anticipated operating profit of $531.7 million.
"Our fourth quarter operating income before the potential impact of the proposed Spanish regulation is expected to be at a record level," said CEO Vincent Volpe Jr. in a statement. "However, it will be lower than our earlier expectation."
Excluding the impact of proposed Spanish regulation, management expects revenues for 2014 to be between $3 billion and $3.2 billion, lower than analyst consensus of $3.45 billion.
Management also noted that its suspended operations could remain so until the Spanish regulation has been finalized. A prolonged suspension would reduce full-year 2014 revenues by around $125 million.
The company is due to report its fourth-quarter and 2013 full-year results at the end of February.
TheStreet Ratings team rates DRESSER-RAND GROUP INC as a Buy with a ratings score of B-. The team has this to say about their recommendation:
"We rate DRESSER-RAND GROUP INC (DRC) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its impressive record of earnings per share growth, revenue growth, notable return on equity and compelling growth in net income. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- DRESSER-RAND GROUP INC has improved earnings per share by 18.5% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, DRESSER-RAND GROUP INC increased its bottom line by earning $2.35 versus $1.56 in the prior year. This year, the market expects an improvement in earnings ($3.19 versus $2.35).
- Despite its growing revenue, the company underperformed as compared with the industry average of 8.2%. Since the same quarter one year prior, revenues slightly increased by 6.6%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- The net income growth from the same quarter one year ago has exceeded that of the S&P 500, but is less than that of the Energy Equipment & Services industry average. The net income increased by 19.9% when compared to the same quarter one year prior, going from $41.20 million to $49.40 million.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Energy Equipment & Services industry and the overall market on the basis of return on equity, DRESSER-RAND GROUP INC has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
- The gross profit margin for DRESSER-RAND GROUP INC is currently lower than what is desirable, coming in at 32.18%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 7.79% trails that of the industry average.
- You can view the full analysis from the report here: DRC Ratings Report