Top Picks 2020: KLX Energy Services

01/22/2020 5:00 am EST

Focus: ENERGY

Richard Howe

CEO, Stock Spin-off Investing

KLX Energy Services (KLXE) has declined by 78% since its spin-off last year and many of its energy services peers have gone bankrupt, asserts Richard Howe, editor of specialty advisory service, Stock Spin-Off Investing.

As Baron Rothschild famously said, “The time to buy is when there’s blood in the streets.” Well, there is blood in the Street! But how do we know this isn’t a value trap or worse a future bankruptcy?

First, the company is conservatively managed and has one of the best balance sheets in the industry. It’s debt to EBITDA ratio is 1.2x with no debt due until 2025. Further, it has $121MM of cash.

Second, the company is run by an excellent and highly aligned management team. The management team previously founded B/E Aerospace and KLX Inc. B/E Aerospace was eventually sold to Rockwell Collins for 12.4x EBITDA.

KLX Inc. was eventually sold to Boeing (BA) for 14.3x EBITDA. Management decided to forgo a salary in exchange for restricted stock in KLXE. My guess is KLXE is eventually sold once energy industry conditions improve.

Third, KLXE just concluded its heavy capital expenditure phase and will generate significant free cash flow in 2020. 

Fourth, KLXE’s current unused share repurchase authorization of $49 million represents 33% of its current market cap. I expect to management to aggressively buy back stock. 

Five, KLXE, trading at 3.6x EBITDA, is dirt cheap. This valuation is cheap on an absolute and relative basis. Note Apergy, a larger energy services competitor, recently announced that it has agreed to acquire Ecolab’s energy division for 12.5x EBITDA.

Sixth, there has been heavy insider buying. The CEO, CFO, controller, VP of operations, and several directors have all bought shares in the open market recently. 

For those with a contrarian streak and the stomach for volatility, Buy KLXE for its multi-bagger potential. I expect it to trade several multiples higher in a couple years.

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