In a June 12 research note, analyst J. Marshall Adkins indicated that Raymond James initiated coverage on Nine Energy Service Inc. (NINE:NYSE), a "premier, niche, Northern American completions player" with a Strong Buy rating and a $40 per share target price. The current stock price is around $29.62 per share, a valuation that "alludes to promising upside" of about 35%. He added that in its space, Nine "is uniquely positioned to profit from anticipated growth and emerging capacity constraints."
Adkins listed a handful of external trends in the horizontal well market, to which Nine has great exposure, which should drive growth for the company over the ensuing five years. They are a preference for horizontal over vertical wells along with increases in the number of horizontal wells completed annually, the lateral lengths for horizontal well bores, horizontal well complexity and fracking stage counts.
Internally, Nine has specific advantages that should lead to growth as well, both via cash flow generation and acquisitions.
One such benefit is the niche nature of its completions business, being in subsectors that tend to be "more value added, less commoditized," and less competitive than, say, pressure pumping, noted Adkins. Those segments include horizontal well cementing and completion tools, cased hole wire line and large diameter coiled tubing.
Another plus is Nine's strong management team, specifically their ability to exercise financial discipline and generate EBITDA growth, as evidenced by the company's returns, Adkins pointed out. For instance, the company attained a 16% return on invested capital (ROIC) in 2014 and now aims for a 20% ROIC in the out-years. Similarly, Raymond James forecasts for Nine a 9% return this year and an 18% return in 2019.
Nine should reach those targets, added Adkins, "through both price- and efficiency-driven gross margins expansion with limited external capital needs and meaningful free cash flow generation (estimated free cash flow yield of 6% in 2019), allowing for further growth funding through operations."
A final benefit is Nine's "pristine balance sheet" Adkins purported. The company has no debt, which positions it well to continue executing on one of its key strategies, to grow via mergers and acquisitions.
Given the above, widening margins are expected for Nine, wrote Adkins. Raymond James forecasts the company will achieve an EPS of $1.63 and EBITDA of $124 million in 2018 and, moreover, an EPS of $3.60 and EBITDA of $193 million in 2019.
As for today, Adkins concluded, Nine boasts an "attractive valuation given its growth, returns and balance sheet."
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Disclosures from Raymond James, Nine Energy Service Inc., June 12, 2018
Analyst Compensation: Equity research analysts and associates at Raymond James are compensated on a salary and bonus system. Several factors enter into the compensation determination for an analyst, including i) research quality and overall productivity, including success in rating stocks on an absolute basis and relative to the local exchange composite Index and/or a sector index, ii) recognition from institutional investors, iii) support effectiveness to the institutional and retail sales forces and traders, iv) commissions generated in stocks under coverage that are attributable to the analyst's efforts, v) net revenues of the overall Equity Capital Markets Group, and vi) compensation levels for analysts at competing investment dealers.
The views expressed in this report accurately reflect the personal views of the analyst(s) covering the subject securities. No part of said person's compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. In addition, said analyst has not received compensation from any subject company in the last 12 months.
RAYMOND JAMES RELATIONSHIP DISCLOSURES
Raymond James Ltd. or its affiliates expects to receive or intends to seek compensation for investment banking services from all companies under research coverage within the next three months.
Raymond James & Associates co-managed an initial public offering of NINE shares within the past 12 months.
Raymond James & Associates makes a market in shares of Nine.