Buy: Carbo Ceramics Inc. (CRR)
Listed on the New York Stock exchange
Current Price $7.11
How much to invest 10% of your Portfolio
Sell between $85.00-$94.00
Carbo Ceramics (NYSE:CRR) is one of many interesting US oil service
companies. It was a market darling during the last cycle and is arguably
the world leader in high quality ceramic proppant - a critical input for
maintaining the pressure and longevity in fractured Ills. They also
supply frack sand and other fractured Ill services.
I am attracted to CRR because of its upside. The stock hit $183.34 in
2011 and traded over $80.00 for most of the period between 2011 and 2014.
They also paid a modest dividend until the end of 2015. The balance sheet
is decent with a net cash position, current assets double all liabilities,
and it has a fairly flat share count with just 27 million outstanding.
Insiders own over 15 percent, have purchased some equity in the past year,
and are industry veterans.
Will update some more information in the next couple of days.
Also, please dont buy this stock unless you understand the risks and also the reasons behind buying this.
But, there are reasons to be bearish! This is one of the most shorted
stocks in the sector with 53 percent of its float sold by short sellers.
But, there are reasons to be bearish! This is one of the most shorted
stocks in the sector with 53 percent of its float sold by short sellers.
For comparison, CENX had 43 percent of its shares short in Q4 2015. CRR´s
bear thesis is based on a revenue implosion which has shrivelled sales
from $667 million in 2013 to $103 million in 2016. Carbo´s sales decline
was worse than many peers because drillers opt for cheap sand rather than
fancier alternatives when oil prices are low. The contraction has been so
harsh the company has not produced a gross margin since 2014. Cost cutting
efforts have failed to keep pace, operating income has vanished, and don´t
even ask management what net income is, they have likely forgot.
The CFO doesn´t get along with the SEC either. This stems from a
disagreement over the accounting methodology used to determine if certain
assets are impaired and need to be written off. This dispute sure helps
the short seller´s case. Some investors fear low cost Chinese propellant
imports if oil rallies. Though imports were somewhat of an issue in the
last cycle, it didn´t prevent the stock from trading at sky high levels,
and that was before the midnight musings of a hair-triggered anti-import
tweeter.
So why invest now? Sentiment has gone negative as current inventory levels
are higher than expected. WTI oil has swooned to $47.50 after trading in
the mid-$50s for the first three months of the year. That means many
petroleum stocks are giving back recent gains, making them more
interesting to those of a contrarian bent.
Management anticipates low double digit revenue growth and positive EBITDA
by year end. These improvements are based on restarting a frack sand
facility, launching new products, and expanding business outside
commodities. Finally, the billionaire Wilks Brothers, purchased a 5.6
percent stake in October and have loaned the corporation money. They are
famed oil investors and one of their latest wins is Calgary´s Trican Well
Services (TSX:TCW). Unlike their investment in TCW however, the brothers
filed a 13D with the SEC which suggests they may push management to
consider strategic alternatives for the business.