Lufkin Industries Declines on Lowered Full-Year EPS Guidance (LUFK)

Oilfield service company Lufkin Industries (NASDAQ: LUFK) reported a rise in the fiscal 2012 third-quarter revenues and earnings compared to the year-ago corresponding quarter, in line with the July guidance, aided by the steady sales of new pumping units and strong performance of Quinn’s Oilfield Supply acquired last year. The third-quarter earnings per share were in line with the analysts’ consensus while the reported revenues beat the street estimates for the quarter. While lowering the full-year 2012 guidance, the company also gave its fiscal 2012 fourth-quarter revenue and earning guidance that were below the consensus estimate.

The Texas-based Lufkin manufactures oilfield and power transmission products for use in energy infrastructure and industrial applications. The company’s oil filed pumping units are generally considered to be industry standard.

Revenues for the fiscal 2012 third quarter increased 47% to $340.35 million from $231.71 million in the prior-year corresponding quarter. The average estimate of analysts was $331.2 million for the third-quarter of 2012.

Net income for the reported quarter was $26.3 million, or $0.78 share, compared to $14.43 million, or $0.47 per share, in the third quarter of last year. The earnings estimate of analysts was $0.78 for the third quarter of fiscal 2012.

Commenting on the results, John Glick, president and CEO, stated, “As expected, international markets strengthened during the quarter. Egypt, Latin America and Canada all posted higher revenues. Canadian bookings were lower on reduced drilling activity, which will impact the fourth quarter, but revenues during the third quarter were sequentially higher.”

The share price of Lufkin, which had a phenomenal run from around $50.00 in the year 2010 to $93.50 in April 2011, slid back to $50.00 on October 2011 owing to a fall in the price of crude oil and Greece debt concerns. On December 23, Lufkin announced the completion of the acquisition of all of the assets of Quinn’s Oilfield Supply, resulting in a rise in the share price to $74.43 by January 12. Following the acquisition, SunTrust upgraded the rating to “buy” from “neutral” with a target of $100.00 per share. Two days later, the company reported a 42% rise in the fiscal 2011 fourth-quarter profit beating the revenue and earnings estimates of analysts. This sequence of events spurred further buying interest that led the share price to $85.39 on February 23.

Lufkin’s fiscal 2012 first-quarter results reported on May 7 were below expectations. Moreover, the company cautioned that the second-quarter results would be below street estimates as well. The warning resulted in a steep fall in the share price to $50.05 on June 25. On July 26, Motley Fool report pointed out the rising inventory at Lufkin. Three days later, the reported fiscal 2012 second-quarter results, in line with the warning issued earlier, fell short of estimates. However, it was the caution for the third-quarter that triggered the sell-off that time, resulting in a decline in the share price to a 52-week low of $45.11. The fiscal 2012 third-quarter dividend declared on August 9 stabilized the share price at around $50.00.

On September 24, Global Hunter downgraded Lufkin to “accumulate” from “buy”. Fortunately for Lufkin, an upgrade on October 11 by Howard Weil from “market perform” to “market outperform” stopped the share price from declining again below the $50.00 mark. In the meanwhile, there were several reports indicating a possibility of Lufkin’s buyout by other oilfield service companies.

Following the gloomy full-year guidance issued on October 29, the share price, which opened with a negative gap at $51.50, plunged more than 8% to hit a low of $50.05 within minutes of opening of the trading session. With no respite in selling, the share price fell below the $50.00 mark before noon and recovered a notch above the psychological $50.00 level at the end of the day.

Lufkin issued fiscal 2012 fourth-quarter revenue guidance in the range of $340 million to $350 million. The guidance is lower than the $355.21 million estimate issued by the Capital IQ analysts. The company anticipates fourth-quarter earnings per share between $0.80 and $0.90. The EPS estimate of Capital IQ analysts is $1.00 per share.

For the full-year 2012, Lufkin narrowed consolidated revenue guidance in the range of $1.26 billion to $1.27 billion from $1.25 billion to $1.27 billion issued in the previous quarter. The company lowered its earnings estimate, before adjusting for special items, between $2.81 and $2.91 per share from $3.00 to $3.20 per share issued earlier. The estimate of analysts is $3.00 per share for the full-year 2012.

Regarding the fourth quarter, the CEO said, “Because oil prices have pulled back to $85 in recent weeks and 2012 capital budgets in North America have largely been consumed, several key customers are scaling back their fourth quarter spending. As a result, we expect activity levels and bookings to slow in the fourth quarter. The slowdown is likely to be compounded by the fact that several customers placed large orders in the second and third quarters that covered their requirements for multiple quarters.”

Lufkin Industries ended the day at $50.01 per share, down $4.03 or 7.5% on a volume of 1.59 million shares.

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Published by Steve Hackney

Steve Hackney is a corporate finance professional with over 14 years of experience in cash management and investing. He earned a Bachelor of Science in Finance from Florida State University and holds a Certified Treasury Professional certification. Steve lives in Orlando, Florida with his family.