Can Forum Energy Technologies Recover from Energy Price Crash?
(Continued from Prior Part )
What does Forum Energy’s CEO think?
Forum Energy Technologies’ (FET) management expects its revenue and operating margin to decline in fiscal 1Q16. In its fiscal 4Q15 conference call, FET chair and CEO (chief executive officer) C. Christopher Gaut commented, “We expect to see our first-quarter revenues drop 10% to 15% from the fourth quarter to the first quarter, and decremental margins in the mid-30s range. However, our free cash flow generation will be strong.”
Forum Energy Technologies’ sticky cost structure
In the fiscal 4Q15 conference call, Forum Energy management pointed out why FET’s cost structure may not fall significantly. Gaut said, “Our operating margins declined in the fourth quarter, as it is now more difficult to further reduce costs in line with declining revenue. Over the prior four quarters, we were able to significantly scale down our costs roughly in proportion with revenue. But operating leverage and fixed costs are now working against us, causing more under absorption of manufacturing costs.”
Analysts’ targets for FET
Given the unpredictability of energy price recovery, Wall Street analysts have varied opinions about FET’s target prices in the next 12 months. While the lowest target price for FET is $9, the highest is $23. The median target price, surveyed among the sell-side analysts, is $12.10. Forum Energy Technologies is currently trading at $12.80, implying a 6% downside at its median price.
Oil States International (OIS), FET’s peer, received a $29 median target price. This, relative to its current price of ~$28.70, implies a 1% upside. Forum Energy Technologies is 0.1% of the iShares Russell 2000 Value ETF (IWN). For investors looking for exposure to the energy sector, energy makes up 3.7% of IWN.
Next, we’ll discuss Forum Energy Technologies’ revenue and earnings.
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