If you purchased CJES after my post on October 28, you have probably experienced a 20%+ gain so far. Not bad for a month and a half.
But I think this one has got farther to go.
To evaluate stock price movement, lets use three metrics:
1. Participant’s Bias, or perception in the marketplace
2. Price movement (including the technicals about supply and demand of the stock)
3. Underlying Trend (including fundamentals about the company’s earnings, balance sheet, and cash flows)
1. Participant’s Bias
The major market participants are funds and banks, so lets take a look at what analysts are saying about CJES.
Of the five analysts following the stock, three have rated it a strong buy, and two have rated it a buy, with a mean target of 33, and a low target of 28.
In addition, the perception of the underwriters was that the stock was worth $25-$28 per share back in August, and the stock opened above that, at ~$29/share indicating that the market perceived an even greater value. Now, CJES has paid down its debt and further proved its growth trends, it must surely be worth as much or more.
2. Price Movement
Today, CJES surged ahead on the strongest volume that the stock has had since it came public. The strong buying volume indicates strong demand for the stock right now. The Momentum is strongly positive, and the RSI does not indicate overbought levels yet.
3. Fundamentals and Underlying Trend
CJES has paid down its debt, and had a 172% revenue growth rate for Q3 year-over-year. It grew earnings 225%. Wow.
It has just deployed a sixth fracking fleet, which should add significantly to revenue for Q4. It is currently ordering its seventh and eighth fleets, which should add to revenue next year.
CJES now has 75% of its operations in oily basins, making its fundamentals relatively immune to the low natural gas prices that have been affecting shale-gas production. Oil prices north of $80/bbl should be able to maintain a consistent demand, and with prices hovering near $100, CJES should not be facing any problems.
Gas prices might also make a rebound, as today it was announced that stockpiles were lower than anticipated (1). If prices do not rebound, it will be because there is simply too much production going on, which, of course, is good for CJES.
CJES pre-tax gross profit margin was 60.6% this quarter, which is slightly lower than last year’s Q3 profit margin of 62.6%, indicating slightly less favorable pricing for its services year-over-year (more on this later). However, its pre-tax profit margin was 32% as compared to last year’s 27%, indicating that the company is now able to leverage fixed costs like administrative expenses to gain greater revenue.
Additionally, the fundamental trend of exploiting conventional reservoirs using horizontal drilling seems to be intact as well, with drillers reporting good results. Horizontal drilling requires more hydraulic fracturing.
This seems to be one of the lowest-risk, highest return trades or investments that I can find. The problem here is that this situation may not be sustainable.
Oil and gas service companies are not stupid. They have known about the trend of increasing demand for hydraulic fracturing for a while (i.e. years). The problems so far have been a) getting the capital to build frac fleets, and b) accurately deploying fleets to areas with the highest demand. Because the situation has been going on for so long, I expect that many of the major players have been adding to their fracking fleets in the same manner as CJES.
There is a similar shale gas explosion going on in other countries around the globe, but they are even more constrained than the U.S. by the inavailability of fracking fleets.
If fracking fleets will be deployed to other countries around the globe as quickly as they are manufactured, the state of supply/demand imbalance will continue in the United States, continuing favorable pricing for CJES. If not, then we may expect to see a decline in CJES’s gross profit margin.
To see if this has yet happened, let’s take a look at the gross margin for the past five quarters:
The gross margin took a dive in the first quarter, but has been recovering ever since. Because we are seeing growth in the margin quarter over quarter, I don’t think there is cause for concern… yet.
The other risk I can see is a potential action by Congress to affect the hydraulic fracturing process. It could result in delays or increased costs for CJES.
The question with this stock is not when so much when to buy, but when to sell. If you have not bought it, I would suggest the next few days as a prime time to get in. Let’s monitor this one closely, and get out before it busts.
Disclosure: I own shares of CJES. I do not own shares of HAL or SLB. I am planning on adding to my CJES position in the next few days.