Investment Jungle

Back to looking for our Rule #1 stocks, on deck today is Dril-Quip Inc which trades on the NYSE under the symbol DRQ. This has been a high flyer over the last few years. Is this a Rule #1 stock? Is it trading at an attractive price? Let’s find out.

Company Profile:

From Yahoo Finance

Dril-Quip, Inc. designs, manufactures, and services engineered offshore drilling and production equipment for use in deepwater, harsh environment, and severe service applications. The company’s products include subsea equipment comprising subsea wellheads, mudline hanger systems, specialty connectors and associated pipe, subsea production trees, valves, TLP and Spar well systems, liner hangers, multiplex subsea control systems, and multiwell subsea manifolds, which are used in the drilling and production of offshore oil and gas wells; surface equipment, such as platform wellheads and platform production trees, which are used for flow control on offshore production platforms, TLPs, and spars; and offshore rig equipment, including drilling and production riser systems, and wellhead connectors and diverters. It also provides installation and reconditioning services, and rents running tools for use in connection with the installation and retrieval of its products.

Market capitalization is $2.00B.

Fundamental Analysis:

Did management meet our minimum Rule #1 performance metrics? Unfortunately not. In fact, the company consistently failed to meet a return on invested capital of 10% or more in 7 of the last 10 years! The 5 year average ROIC is 9.8%.

And this was reflected in the return on equity data as well. The 10 year average ROE is 9.08%. The 5 year ROE is slightly worse at 9%.

Now, all the growth rates did definitely meet our Rule #1 investor minimums of 10%.

The equity growth rate has been on a steady, steep climb. The 9 year rate is 11.57%. The 5 year rate climbs to 17.63%. The 3 year rate jumps almost 10% to 27.16% and last year’s equity growth rate was 35.52%. You have to love that trend.

And if you think that trend looks good, wait until you see the EPS growth rates. They will blow your mind! The 9 year rate is 11.65%. The 5 year rate explodes to 44.21%. The 3 year rate hits the moon at 68.65%. And last year’s EPS growth rate? Right out of the universe at 138.89%!

Sales growth rates have also been climbing. The 9 year rate is 10.97%. The 5 year rate climbs to 16.29%. The 3 year rate jumps to 28.86% and last year’s sales growth rate remains at 29.9%.

Cash flow growth has had more stellar growth. The 9 year rate is 12.8%. The 5 year rate jumps to 31.52%. The 3 year rate doubles up to 63.07%. And last year’s cash flow growth rate was 111.31%.

Definitely some fantastics trends in the growth rates.

Stock Analysis:

Let’s slap a sticker price on this baby and see how the price looks.

For my future EPS growth rate, I decided to use the 5 year equity growth rate of 17.63%. Typically I would have used the more conservative 9 year rate, but the incredible uptrend in equity growth rate makes the 5 year rate seem more reasonable.

And what did the analysts forecast? Hold on to your hats. A future EPS growth rate of 45%! How long do you figure they could sustain that kind of growth rate for? I will use my more conservative estimate.

For my future P/E, I will use the current P/E of 20.8 which in fact is considerably more conservative than the 10 year average P/E of 31.51 and the 5 year average P/E of 26.39.

With this information, my sticker price works out to $61.79. At the current price of $49.29, this stock is trading at a large 20.29% discount!

Here is my Rule #1 analysis of DRQ.

Here is the 1 year stock price chart:

It has been a very volatile year for DRQ. In fact, you could have purchased this stock back in September at almost the MOS price of $30.90.

Conclusion:

Is this a Rule #1 stock? No. Management’s performance in the return on invested capital clearly does not meet the Rule #1 criteria.

But you have to be impressed with those growth rates!

Full disclosure: I do not own shares in DRQ.

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