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Flotek Industries: Wall Street’s Target and Relative Valuation

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Part 2
Flotek Industries: Wall Street’s Target and Relative Valuation PART 2 OF 7

What Flotek Industries’ Historical Valuation Suggests

Flotek Industries’ PE trend

On June 30, 2017, Flotek Industries’ (FTK) stock price fell 5%—compared to its stock price on December 30, 2016. In 2Q17, Flotek’s adjusted earnings were extremely low. So, Flotek’s PE (price-to-earnings) multiple was high in 2Q17. Flotek Industries’ PE multiple was positive in 2016, but it wasn’t meaningful in 2015 due to negative earnings.

Flotek Industries’ forward PE multiple is much lower than its PE multiple in 2Q17, which indicates a sharp earnings recovery in the next four quarters. Flotek Industries accounts for 0.02% of the iShares Russell 2000 ETF (IWM). Since June 30, 2017, IWM has fallen 3%—compared to a 33% fall in Flotek’s stock price.

What Flotek Industries’ Historical Valuation Suggests

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Price-to-cash flow multiple

In 2Q17, Flotek’s CFO (cash flow from operations) was negative. So, the PCF (price-to-cash flow) multiple wasn’t meaningful in 2Q17. Flotek’s forward PCF is significantly lower compared to its PCF multiple in 2016, which reflects analysts’ expectations of improved cash flow in the next four quarters.

Flotek Industries’ EV-to-EBITDA trend

Flotek Industries’ historical valuation, expressed as the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple, rose from 2016 to 2Q17. During this period, Flotek’s net debt fell 10%, while its stock price also fell. In effect, the EV fell marginally in 2Q17—compared to 2016. Flotek’s adjusted EBITDA fell sharply in 2Q17—compared to 4Q16. The EV-to-EBITDA ratio rose sharply in 2Q17. Flotek’s EV-to-EBITDA multiple in 2Q17 was much higher than its average EV-to-EBITDA multiple in the past seven years. EV is approximately the summation of equity value and net debt.

Forward EV-to-EBITDA multiple

Flotek Industries’ forward EV-to-EBITDA multiple is much lower than its 2Q17 EV-to-EBITDA multiple, which reflects analysts’ expectation of higher EBITDA in the next four quarters. It explains Flotek’s high current EV-to-EBITDA multiple.

In comparison, Flotek’s larger market cap peer National Oilwell Varco’s (NOV) forward EV-to-EBITDA stands at ~15.5x, while Superior Energy Services’ (SPN) forward EV-to-EBITDA is ~8.1x. To learn more, read National Oilwell Varco’s 2Q17 Earnings Beat Estimates. Core Laboratories’ (CLB) forward EV-to-EBITDA multiple is ~25.5x.

In the next part, we’ll discuss Flotek’s valuation compared to its industry peers.

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