Furmanite. The name sounds like a 1950s-era maker of floor coverings and countertops. But in fact, it's one of the largest global providers of specialized maintenance and inspection services to oil refineries, petrochemical plants, and offshore oil rigs. It's a very attractive investment, as well.
Since Charles Cox, a longtime industrial-services veteran, took over as CEO in 2010, Furmanite (ticker: FRM) has undergone a major transformation, by centralizing its previously disparate global operations.
From a company made up of 75 nearly autonomous service locations that operated regionally, Houston-based Furmanite has been remade into a cohesive operation offering its services across the globe. In addition, it has expanded its service lines, and it's now better positioned to benefit from the trend of oil and gas companies' preference for bigger providers in the heavily fragmented service market.
After a rocky ride that was made worse by a tough European economy last year, the changes are producing results. In the first half of the year, sales jumped 25%, and operating income nearly quadrupled, helped by a tailing off of restructuring costs. In August, management lifted its revenue and earnings guidance for the year.
The two Street analysts who follow the stock see sales growing 33% this year to $432 million -- with earnings of $17 million, or 45cents a share -- and 27% to $550 million in 2014. The company earned 11 cents a share in 2012. Furmanite is due to report third-quarter earnings on Nov. 1.
Investors have taken notice. The shares have doubled this year to a recent $ 10.84. Despite the rally, Furmanite's stock could have more room to run.
Ross Taylor, a portfolio manager at Somerset Capital Advisors, which owns Furmanite in its funds, thinks that over the next 18 months, the share price could increase by about 30%.
The new organizational structure, new lines of business, and growing demand for its services from the oil and gas industry could drive further gains.
Taylor estimates that in 2014, Furmanite could earn 68 cents to 70 cents a share. His estimate is above the 59 cents that the two Wall Street analysts who cover the company predict. At 20 times his 2014 estimate, in line with peers Team (TISI) and Mistras Group (MG), Taylor thinks the stock could be worth $14 a share.
Founded in the 1920s, as a maker of leak-sealing kits for steam-driven naval boats, Furmanite specializes in leak sealing and pipe-and-valve repair at high- pressure facilities. The company also provides testing and inspection services. Oil refineries and petrochemical plants account for 65% of sales. Power plants, offshore oil rigs, and mining customers account for the remainder.
Furmanite has 1,600 technicians who work out of 80 offices on six continents, with North America and Europe accounting for most of its business. Technicians work on-site at the client's plant. Much of the work is routine maintenance when the plant is shut down, but the technicians also work in emergency situations, during unplanned outages. This is very profitable, high-margin work.
Management has also been adding new lines of business, outside its traditional mechanical expertise, which could boost sales. Last year, the company began acquiring companies that provide plant-inspection services. The inspection business, while it is probably lower-margin than the traditional offering, could help Furmanite win more mechanical and repair work from customers that hire out the company as their inspector.
Matt Duncan, an analyst at Stephens, notes in a recent report that he believes "Furmanite has been aggressively going after market share in inspection," and that the business "could be a key growth driver."
In September, Furmanite bought the Gulf Coast project-management business of ENGlobal (ENG), which handles the management of oil and gas facilities. Similar to inspection, the work is lower-margin than its typical services, but the presence could help Furmanite score new repair work.
Future acquisitions that build on the company's offerings could also be in the cards. With just $40 million in net debt, management has plenty of flexibility to do just that.
On its second-quarter conference call in August, CEO Cox affirmed the growth strategy by saying, "We are continuing to define and target a larger market size, as well as a greater share of the larger market." He added that the company is looking forward to combining "the capabilities of ENGlobal's Gulf Coast operations with our mechanical and inspection services." Management couldn't be reached for comment.
Furmanite has the wind at its back. During the recession, its refinery and chemicals customers deferred routine maintenance to save on costs. That is no longer the case. U.S. oil refineries and petrochemical plants are running at high levels, due to renewed investment in oil and gas production, and cheap natural gas, a key feedstock. That bodes well for the company -- and the stock.
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