Upside for Oil Service

09/09/2005 12:00 am EST

Focus:

Richard Moroney

Editor, Dow Theory Forecasts

"For investors seeking timely industry groups, the oilfield suppliers are tough to beat," notes Richard Moroney inUpside. "With replacement demand in the wake of Katrina, these stocks are in the sweet spot now and have superior 12-month potential."

"Maverick Tube (MVK NYSE) seems poised for continued robust growth. Demand for its tubular products is closely tied to drilling activity. With prices rising and raw material costs declining with steel prices, profit margins and earnings should improve considerably over the next four to six quarters. At less than seven times expected 2006 earnings of $4.63 per share, the stock seems unduly cheap. Based on price/sales and price/book value ratios, Maverick is one of the few oilfield-supply stocks trading at the low end of its historical valuation range. Maverick, which recently announced the resignation of its president, remains a Best Buy.

"Cal-Dive (CDIS NASDAQ), a leading marine contractor with a growing presence in energy production, is uniquely positioned to capitalize on high energy prices. Cal Dive’s sales backlog should remain on an uptrend. Damage from Hurricane Ivan in 2004 triggered a surge in demand for Cal Dive’s subsea pipeline services. Hurricane Katrina may have caused similar damage this year. The stock seems reasonably valued at 16 times the 2006 consensus profit estimate of $3.84, and Cal Dive seems likely to exceed that target. The stock remains a Best Buy.

"With niche acquisitions complementing attractive positions in fast-growing markets, Oil States International (OIS NYSE) is outperforming its oilfield peers. Per-share earnings surged 74% on a 62% sales gain in the first half of 2005. Robust growth should continue over the next 12 to 18 months—even if oil and natural gas prices decline significantly. The stock, a Best Buy, earns an impressive Overall Quadrix score of 97, reflecting high marks for operating momentum, earnings-estimate trends, and share-price performance. Earnings estimates for 2005 and 2006 have risen sharply in the last three months, but the company still seems capable of beating expectations.

"Outside of the oil service sector, one stock poised to benefit from Katrina is Mobile Mini (MINI NASDAQ), a maker of portable structures, whose stock has also rallied. It is the nation’s largest publicly traded portable storage company, operating a fleet of more than 110,000 portable storage units and mobile offices. With 49 branches in 29 states and one Canadian province, the company serves about 75,000 customers. Uses for Mobile Mini’s storage units include retail and manufacturing inventory, construction materials and equipment, and documents and records. The stock, showing bullish price action, is ranked a Buy."

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