Sector Watch: Industrial services stocks
With the onset of old age, there invariably comes the tweaking of this or the fine-tuning of that, and with industrial infrastructure it is no different. Furmanite Corporation (NYSE: FRM) and Team, Inc. (Nasdaq: TISI) are capitalizing on the growth opportunities in this sector by providing the repair services that keep it operating.
Refineries and power generation plants worldwide are operating at record high utilization rates to keep pace with rising demand. These plants suffer from frequent leaks and breakdowns because of overworked, poorly maintained equipment. In North American alone, the market for on-stream leak repairs consists of more than 10,000 plants and represents a $2.5 billion annual market opportunity. Demand is stable since repair services are considered a “necessary evil” and performed regardless of plant profit margins.
One company performing the necessary evil is Furmanite, a provider of on-site repair of leaks in valves, pipes and other flow process system components. In addition to leak repair, Furmanite provides hot tapping services, fugitive emissions monitoring, passive fire protection, concrete repair, heat exchanger design, manufacturing design and repair and diagnostic services for valves and motors.
Formerly known as Xanser Corp., the company took the name of its principal subsidiary, Furmanite, in May 2007.
Furmanite’s customers come from the offshore drilling, refinery and power generation, chemical and petrochemical, pipeline, steel-making, automotive, pulp and paper, food and beverage processing, semiconductor and pharmaceutical manufacturing industries. The company operates from 50 locations across five continents.
Its services are often provided on an emergency basis and work is performed 24 hours per day, seven days per week. Furmanite’s competitive strengths include its proprietary technologies (the company holds 130 patents), a 75-year history, long-standing customer relationships and a well-known brand. The company is one of only two national on-site leak repair services providers; most of its competitors are “mom and pop” shops providing services locally. The company generates about one-half its revenues from Europe and the rest from the United States and Asia-Pacific.
Furmanite’s revenues rose 21% year-over-year in the first nine months of 2007 to $217.4 million from $179.6 million. Operating income improved nearly 14-fold in the nine-month period to $14.8 million from $1.4 million one year earlier. Net income rose to $9.1 million, or $0.26 per share, versus a net loss of $2.6 million, or $0.08 per share, in the same period one year ago. Full-year 2007 EPS is forecast at $0.35 versus a $0.10 loss one year ago. Analysts are predicting 63% growth next year and look for longer-term growth averaging 20% annually. My $15 price target for Furmanite is above its closing price on Tuesday of $10.82. Over the last 52 weeks, shares have ranged between $4.90 and $13.
In the same business as Furmanite is Team, Inc., which also provides maintenance and repair services for high temperature, high pressure flow process systems. The company provides on-stream repairs of leaks in valves and pipes, hot tapping services, emission controls monitoring, field machining and technical bolting to repair or modify equipment, non-destructive testing and inspection services and field heat-treating services.
Founded in 1973, Team is the market share leader in on-line leak repair with a 25% market share and the number one position in leak repair, fugitive emissions monitoring and field heat testing.
Team serves approximately 6,500 customers worldwide from 80 locations across the United States, Aruba, Canada, Singapore, Trinidad and Venezuela, and has the largest North American service network. Team’s customers come from the refining, petrochemical, power generation, steel, pulp and paper, aerospace, automotive and pipeline industries.
The company estimates its potential market has grown to more than $2.5 billion today from approximately $500 million a few years ago.
Team is supplementing its organic growth with acquisitions. The company extended its presence in the Canadian market through the June 2007 acquisition of Altec, a pipeline repair company. Altec adds $50 million to annualized revenues and is immediately accretive to Team’s earnings.
In January 2008, Team announced plans to purchase Leak Repairs Specam, a specialty industrial services provider in the Netherlands. Leak Repairs Specam is the leading service provider in the Benelux Region, with annual revenues of $22 million and five locations across the Netherlands and Belgium. This acquisition provides Team with a springboard for further European expansion opportunities.
Team’s revenues climbed 52% year-over-year in the first six months of FY 2008 to $225.8 million from $148.9 million. Net income surged 62% year-over-year to $11.3 million, or $0.58 per share, from $7 million, or $0.37 per share. In January, management revised its FY 2008 earnings guidance upward and is currently projecting 42% revenue growth in FY 2008 to approximately $450 million and FY 2008 per-share earnings ranging between $1.10 and $1.20, up at least 34% over FY 2007. Analysts expect this company to produce 25% average annual growth over the next five years.
My $40 price target is above Team’s (TISI) closing price of $31.53 on Tuesday. Shares have ranged between $16 and $39.19 over the last 52 weeks.
For more on Furmanite Corporation, read our Watch List profile on the company.
