In a July 3 research note, analyst Praveen Narra reported that Raymond James maintained its Strong Buy rating but reduced its target price on Newpark Resources Inc (NYSE:NR) to $12 per share from $13 (current share price about $7.18) due to the "softer U.S. oilfield and rig count."
Due to the market change, Narra noted that Raymond James now conservatively estimates a Q2/19 EBITDA of $22.5 million, a 10% reduction in 2019 EBITDA and a 9% drop in 2020 EBITDA. For Newpark, the financial services firm lowered its Q2/19 margin projection by 5% and its year-end 2019 margin by 6%.
However, the analyst highlighted that growth is expected in all of Newpark's divisions, thereby increasing margins. The company's fluids segment, he wrote, "still has room for margin expansion as new Gulf of Mexico work and international contracts should offer strong incremental margins."
Margins should see a boost from the company's move into stimulation chemical sales, from which it achieved its first revenue in Q2/19. "The fruits of the expansion of the fluid are beginning to pay off," Narra indicated. "We model about $80 million in stim/chem sales for 2020."
The shift in its composite mats segment, which serves utilities, toward larger transmission and distribution (T&D) customers, once the transition ends, should also positively impact margins due to higher volume and longer term contracts. "For 2020, we expect topline growth of 15.2% year over year as both exploration and production and T&D work continues to grow," Narra added.
He concluded, "Newpark remains our top small-cap growth story for its unique exposure both in and out of the oilfield," noting that with the free cash flow expected in the next two years, the company remains undervalued. At its current share price of $7.18, Raymond James' target price offers about 60% upside and "is one of our highest upside names," he commented.