flotek industries FTK
December 28, 2006 - 1:26am EST by
2006 2007
Price: 26.87 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 275 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Short Description & Summary:
FTK is an energy services business with three segments, one of which is a true growth business with a ton of room to grow, while the other two are cyclical.  The bulk of the company's profits, however, come from  the growth segment (what the company calls its chemicals and logistics segment).  There are currently no analysts covering FTK (though I think that may change in the near/medium-term) and there are no estimates for 2007-2008. (Management has provided guidance for 2006 of $1.25/share and 95-97million in revenue).   I expect earning of at least $2.25 in 2007 and for the stock to attract close to a 20x multiple (at a minimum) on that within 12 months, suggesting a target of $40-45/share.  I think my assumptions here are conservative, so an even higher stock price may result based on higher eps and possibly a higher multiple, closer to 25x.
Overall organic revenue growth for FTK over the last 2 years has been 50-60%, driven primarily by its unique, patented specialty chemicals within its chemicals and logistics division.  FTK has developed a biodegradable environmentally benign drillling fluid, which not only has a "green appeal", but is more cost-effective than traditional fluids.  The chemicals business, as a result, has grown form 12m to 18m to 29m to an estimated $45m from 2003 through 2006.  Segment operating margins are in the 30-35% range.  The key here is that the market for these chemicals is over $4Billion and the specific market opportunity for the biodegradable chemical is $800M.  FTK's revenues here have been driven in large part by one customer, but 1) there is till significant opportunity with this one customer and 2) additional customers are just beginning to sign on now.  The company has just tripled its capacity here in anticipation of substantial growth over the enxt two years.  Also, there is unlikely to be any impact to this segment were there to be a significant falloff in oil prices as this is simply a better product which should take substantial share over the next few years as it has done over the last several.  I think this business alone could generate over $2/share in 2008 ($120m in revs at a 30% operating margin and usig a 35% tax rate).
The other two businesses, drilling products and production products, are more cyclical in nature (most similar to a company such as SPN) and have grown largely through acquisition.  They account for about 35% of segment inocme, and probaly deserve a 10-12 multiple on forward earnings, given their cyclicality and given comparable valuations accorded peers such as spn and whq. 
Here is my summary model:
                    2003     2004     2005     2006E    2007E
revs:     	   15M      22M      53M 	98M     150M
Op Inc             -5M       3M      10M        19M      34M
aftertax:          -6M       2M       7M        12M      22M
eps                -0.95    $.32    $0.94     $1.35    $2.25
Sum of the parts analysis:
2007E (eps and multiple by segment)
chemicals & logsitics: $1.60 *20x= $32
drilling products & production products $0.65* 12x= $7.80
 Target for entity=$40
Keep in mind that I have made conservative assumptions for eps and that the stock has historically traded at even higher valuations.  For example, in early 2006 the stock traded at a 22x overall multiple of estimated 2006 earnings at that time.
customer concentration within chemicals division, though that will become less so over next 8 quarters
energy prices, especially as they may relate to demand for drilling products and production products


Guidance for 2007 which will be provided during 1q07
Expanded IR program during 1h07 which i am anticipating
Sell-side coverage
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