ChampionX (CHX) — a Top Pick for 2021 — was formed when Ecolab (ECL) spun off its energy business and subsequently merged it with Apergy (APY), itself a 2018 spin-off of Dover (DOV), notes Rich Howe, editor of Stock Spin-Off Investing.
The appealing aspect of ChampionX is that the company is profitable throughout the cycle. In fact, it has a counter cyclical component to it as free cash flow increases during weak periods as cash flow is released from working capital.
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 just reported a great quarter and the stock has rallied sharply. The most important factor for me is free cash flow, and the company generated $115MM in the quarter (adjusting for acquisition related expenses) or $460MM on an annualized basis.
Even with the run up — the stock is now up 78% for the year-to-date — ChampionX is still only trading at 9.2x free cash flow. Pre-merger with ChampionX, Apergy traded at ~20x free cash flow.
Not sure if we get all the way back, but I think there's more upside to the stock. The chart looks great as well. My updated price target is $45, implying significant upside ahead.