Since reporting strong earnings in late October, ChampionX (CHX) has been on fire. Luckily, the stock still looks cheap and its chart is a thing of beauty, asserts Richard Howe, editor of Stock Spin-Off Investing.

ChampionX was formed when Ecolab (ECL) spun off its energy business and subsequently merged it with Apergy, itself a 2018 spin-off of Dover (DOV).

The appealing aspect of ChampionX is that the company is profitable throughout the cycle. In its most recent quarter, it generated $98MM of free cash flow ($392MM annualized). Not bad for a company with a $3.4BN market cap.

ChampionX generates ~88% of its revenue from production, or wells that have already been driven. A very small portion of revenue is driven by new wells being drilled. This focus on production enables the company to generate revenue and profits even when industry capex shrinks.

The company has already achieved $72MM of synergies and recently increased its synergy target from $75MM to $125MM. Assuming 70% of those synergies flow through to free cash flow (FCF), normalized free cash flow should increase to $449.5MM.

Prior to the merger, Apergy traded at 20x free cash flow. I believe the quality of the company has improved since the merger with ChampionX has been completed (ChampionX was more focused on production — more defensive — than Apergy).

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But just assuming a 15x multiple on $449.5MM of free cash flow, and the stock will trade at $34, implying ~100% upside.

It's important to note that the past few years haven’t been great in the energy industry. 2014 was the last boom year and at that time, revenue would have been 42% higher than in 2019.

In this scenario, free cash flow would be even higher and who knows what multiple investors would pay. But you don't need to assume a "boom" environment to buy the stock. Even assuming status quo, I expect ChampionX to re-rate sharply higher. I see 100% upside in 2021 and beyond.

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