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Why Is Dril-Quip (DRQ) Up 26.2% Since Last Earnings Report?

It has been about a month since the last earnings report for Dril-Quip (DRQ). Shares have added about 26.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Dril-Quip due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Dril-Quip Misses on Q1 Earnings & Revenue Estimates

Dril-Quip reported first-quarter 2020 adjusted loss per share of 2 cents against the Zacks Consensus Estimate of break-even earnings. However, the bottom line improved from a loss of 12 cents in the year-ago quarter.

It registered total revenues of $96 million in the quarter, higher than $94.3 million in the year-ago period. However, the figure missed the Zacks Consensus Estimate of $99 million.

The weaker-than-expected quarterly results were due to a decline in activity and product deliveries on account of inefficiencies and scheduling delays stemming from the coronavirus pandemic, especially in the Eastern Hemisphere. Higher cost and expenses also affected the bottom line. This was partially offset by higher product volumes, primarily in fabricated joints.

First-Quarter Performance

Dril-Quip reported product bookings of $57.9 million in the quarter. The current market volatility resulted in delays in client decisions to order equipment for the upcoming and scheduled projects. This dragged down the metric from the prior-year quarter. The company’s manufacturing productivity and global supply chain have witnessed disruptions, as clients have adjusted their capital priorities due to market turmoil. Coronavirus-induced lockdowns have resulted in energy demand destruction. This apart, the oversupplied oil and gas market has wreaked havoc on the exploration and production industry by reducing oil and gas prices. As a result, demand for Dril-Quip’s services declined from the year-ago quarter.

Operating loss of $42.3 million significantly widened from a loss of $5.6 million in the prior-year quarter.

Total Costs and Expenses Increase

On the cost front, cost of sales jumped to $71.4 million in the reported quarter from $69.4 million in the year-ago period. Engineering and product development costs rose to $5.5 million in the quarter from the year-ago level of $3.6 million. However, selling, general and administrative expenses declined to $21.4 million from the year-ago level of $24.5 million. Total cost and expenses during the quarter totaled $138.3 million compared with $99.9 million in the year-ago period. The company’s cost-saving initiatives were offset by impairment and restructuring charges.

Share Buyback

In the first quarter, Dril-Quip repurchased 808,389 shares under the stock buyback program (approved on Feb 26, 2019) at an average price of $30.91 per share totaling $25 million. Of the $100-MILLION authorized under the share buyback program, it has used $51 million so far.

Free Cash Flow

Dril-Quip’s free cash flow in the first quarter was negative $25.4 million compared with negative free cash flow of $2.7 million in the year-ago period, owing to slower collections the latter part of the quarter.

Backlog

At first quarter-end, the company had $261 million in backlog, down from $273 million as of Dec 31, 2019. Of the existing backlog, 70% will likely be converted to revenues this year, while the rest will be converted the next year.

Financials

Dril-Quip recorded $4.2 million capital expenditure in the quarter, higher than the year-ago level of $3.5 million.

As of Mar 31, 2020, its cash balance was $343.5 million, down from the fourth-quarter level of $399 million. It had total available liquidity of $388 million. The company’s balance sheet is free from debt load, which indicates a sound financial position.

Guidance

For 2020, it expects maintenance capital expenditures in the range of $10-$15 million.

To navigate through the current market uncertainty, the company plans to streamline business operations, which can result in $20 million of cost savings per annum. Of the total, $10 million is expected to be realized in the second half of the year. Despite the present market situation, it expects to record positive free cash flow in the current year.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -212.5% due to these changes.

VGM Scores

At this time, Dril-Quip has a poor Growth Score of F, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Dril-Quip has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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